22 September 2018

Community lenders — the next step in banking evolution?

In the evolution of the financial animal that is China’s private banking system, one trait is coming in for some selection. In the last few months, local governments have marshalled local interested parties to set up lenders that look a lot like community banks.

Wenzhou Chint Electrics Co. (601877.CN) and Wuhu Xinyi Glass (00868.HK) are two of the latest examples of major industrial players growing new local lending limbs.

These kinds of lenders would seem to be a good way to meet the loan needs of smaller businesses but they face several challenges to finding a place in the funding jungle.

Community banks are defined in the United States as locally owned and operated institutions with less than US$1 billion in aggregate assets. They are generally thought to factor the needs of local families, businesses and farmers into their lending decisions and although they control just 11 or so percent of all US bank assets they are responsible for nearly 35 percent of lending to small businesses. 

Big US banks, meanwhile, devote relatively little of their resources to small businesses. The largest 20 banks, which command 57 percent of all bank assets, allocate only 18 percent of their commercial loan portfolios to small enterprises, according to Federal Deposit Insurance Corporation. It’s a similar situation in China. According to a report last year by the All-China Federation of Industry and Commerce, at least 90 percent of SMEs on the mainland said that they couldn’t obtain loans from banks.

Overseas experience tells us that community banks can better assess risk and make loans to a wider group of small businesses because they know their borrowers, understand their businesses and have a keen awareness of the local market. 

This could be the case for Wenzhou-based Chint. “Chint Group, the leading industrial electrical equipment producer, is linked to 800 to 1,000 small and mid-cap manufacturers in Wenzhou. Chint Bank will position itself as a community bank, and provide funding to the industry that it is familiar with,” the 21st Century Business Herald quoted a private bank applicant as saying.

The central government is well aware of the key role that small businesses play in job creation and has called for stronger support for these enterprises. What better way of doing this than by encouraging community banks?

There are also several key issues, though, that need to be resolved for the industry to develop sustainably and contribute to economic growth. These include the need to clarify publicly the amount of registered capital and related requirements applicants need to meet. So far, there’s still nothing concrete. 

The authorities must also spell out policies related to a proposed deposit insurance system. Until then, private banks will struggle to win the trust of depositors.

– Contact the writer at [email protected]



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