Loans to small and micro firms 'crucial' for lenders

BOC executive says the sector is underserved financially and offers huge opportunities amid the mainland's rebalancing of the economy

PUBLISHED : Monday, 19 August, 2013, 12:00am
UPDATED : Monday, 19 August, 2013, 3:40am

Loans to small and micro firms will not be just a political show but will become crucial for mainland banks in future, an executive of Bank of China said.

Wang Xiaoming, a vice-general manager of personal banking, said BOC had restructured and revised its processes since last year to facilitate micro loans to tap the "ocean" of opportunities in the business.

While the country's largest foreign-exchange lender used to mainly serve large and medium-sized firms, the time had passed for it to rely solely on such clients to grow its loan business, Wang said.

"Large enterprises have their own problems, which will constrain them from growing rapidly," he said. "These companies have other financing channels. As they compare the cost of bank loans with that of bond issuance, interest rate liberalisation will ultimately undermine banks' bargaining power."

On the contrary, mushrooming small companies are severely underserved financially in the world's second-largest economy.

"China is rebalancing, and small and micro firms play an important role," Wang said. "The profitability and development of banks' loan business will largely depend on small and micro loans in the foreseeable future."

In a circular issued last week, the State Council urged more support for small and micro firms, saying they were important in "stabilising growth", "expanding employment" and "boosting innovation".

BOC had 822.5 billion yuan (HK$1.04 billion) of outstanding loans to small and medium-sized firms at the end of last year, second only to Industrial and Commercial Bank of China on the mainland. That was 10 per cent higher than in 2011 and accounted for 24 per cent of its corporate loans. The non-performing loan ratio was less than 1 per cent.

BOC defines micro firms as those with annual sales of less than 25 million yuan or loan amounts less than 3.5 million yuan. At the end of last year, the micro loan business was moved into the bank's personal banking department, because micro firms reflected the characteristics of their owners, Wang said.

"Micro companies are not necessarily more risky than larger ones. Sometimes they are less cyclical and more flexible. As the firm usually matters a lot to the owner, the owner will try his best to make it survive," he said.

The non-performing loan ratio for micro corporate loans is not available as the business is relatively new. Loan quality has been good since the bank teamed up with Singapore sovereign wealth fund Temasek to set up a "loan workshop" for small and medium-sized firms after the 2008-09 global financial crisis. Outstanding loans from the workshop totalled 291.4 billion yuan at the end of June.

"The biggest problem is poor transparency of micro companies," Wang said. "We have to rule out shell companies with no business apart from facilitating financing and companies not engaged in real-economy production. Lending amounts should be appropriate, with money ideally paid directly to their suppliers."

In addition to checking water and electricity meters, which could reflect borrowers' operations, the bank pays attention to changes in the number of employees and salary amounts as indications of micro borrowers' performance.

"These are key leading benchmarks. So we usually require the micro companies to pay salaries through our bank," Wang said.

The bank selected 45 outlets to serve micro firms, and one billion yuan of new loans had been granted to more than 500 clients since April, he said.

"We hope the outstanding loans could amount to 300 billion yuan in three to five years, with an NPL ratio target of less than 3 per cent," Wang said.

The country's larger banks have joined in the competition for high-quality small corporate clients.

Bank of Communications issued a 10 billion yuan bond in the interbank market last month to finance its lending to small and micro firms, becoming the first to sell debt to fund micro loans.

Still, Wang said competition was far from fierce, as most small corporate clients were not served.

"Future competition is very hard to predict," he said, noting the emergence of internet financing, including online peer-to-peer lending firms and e-commerce operators lending to small vendors. "Technology is changing people's lives, the way they manage their wealth, companies' financing choices and banks' business models."