Wenzhou gives nod to private lenders

PUBLISHED : Thursday, 10 November, 2011, 12:00am
UPDATED : Thursday, 10 November, 2011, 12:00am


Wenzhou, regarded as the mainland's capital of private enterprise, plans to create an additional 120 microcredit firms in the next three years as it moves to liberalise private lending.

The city government announced that the 'small loan' companies to be established would have 80 billion yuan (HK$98 billion) in total assets. That will help underpin private businesses suffering a credit crunch.

The aggressive plan to set up new lenders comes after dozens of entrepreneurs committed suicide or fled because of loans they could not repay or the collapse of illegal underground banks.

'The crisis involving Wenzhou's illegal underground banking sector prompted the officials to overhaul the system,' Wu Xiaoling, a former central bank deputy governor, told a financial forum in Shanghai. 'Creating more small-loan firms is conducive to regulating private lending practices.'

For the past decade, entrepreneurs in Wenzhou and other parts of Zhejiang province have been accustomed to borrowing from underground banks that are little more than loan sharks.

A lack of oversight allowed these facilities to get out of control, with many operators of underground banks failing to repay depositors when Beijing tightened monetary controls this year.

The China Banking Regulatory Commission allowed individuals and enterprises to set up microcredit firms in 2006 under a pilot scheme.

These companies can offer loans at a maximum interest rate four times that of a benchmark rate set by the central bank. They are prohibited from taking deposits.

Encouraging more microcredit firms would rein in underground banks, as businesses and individuals would turn more to these legally established companies, Wu said.

Analysts said the Wenzhou plan would simplify applications and offer other incentives, such as tax cuts, for investors interested in setting up microcredit firms.

This week the Zhejiang provincial government announced it would ease restrictions on microcredit companies, allowing them to borrow as much as 100 per cent of their net capital to fund their lending business, up from 50 per cent.

During a visit to Wenzhou in October to observe the problems stemming from the underground banks, Premier Wen Jiabao pledged to give stronger financial support to small private firms. Last week, Wenzhou officials unveiled plans to set up a 5 billion yuan emergency fund to aid cash-starved private companies.