(China Daily)
Updated: 2008-05-12 07:17

The guideline the People's Bank of China and the China Banking Regulatory Commission recently issued on pilot schemes of small-sum loan companies is a much-needed step to facilitate faster development of micro-finance in China.

Pilot schemes had been carried out in five provinces since early 2005 to increase financial support for small businesses and farming. But the absence of an official policy to define the nature of these pilot companies and to guide their operations has long hindered their expansion.

It is expected that the new guideline will encourage the establishment of more small-sum loan companies and enable them to play a more active role in micro-finance.

The transformation of major State banks into ingenious commercial banks in recent years has considerably cut financial support for farmers and small businesses, though the government has repeatedly urged them to grant more small-sum loans. Such loans are simply not attractive to big banks given their relatively high cost and risk. Farmers and small business owners are often unable to provide effective guarantees or present appropriate accounts to lenders.

Micro-finance becomes ever more important as the country tries hard to boost development of the rural areas and job-creating small businesses. Without an adequate access to finance, farmers will find it hard to substantially increase their incomes by seizing all sorts of business opportunities around them. And the prosperity of small businesses that can significantly boost employment also demands greater availability of loans.

Several other types of financial institutes such as rural credit cooperatives, village or township banks and loan companies have already begun to provide small-sum loans. But there are many restrictions on their operations. For instance, under the current rules, each village bank must have a separate board and can operate only within the county where it is located. That makes operating costs much higher.

Though small-sum loan companies are subject to higher requirements on capital, they enjoy greater flexibility in the composition of founders than other micro-finance institutes. Unlike township banks, their establishment does not have to include some banks as founders. Unlike rural credit cooperatives, their founders do not necessarily have to be members of the local community. In other words, small-sum loan companies can provide a much bigger opportunity for private investment to engage in still weaker but much-needed micro-finance.

(China Daily 05/12/2008 page4)