Project Profile: Promoting Commercially-sustainable Lending to Micro and Small Enterprises

Overview

The Micro and Small Enterprise Finance Project, launched in 2005 and supported by a World Bank loan of US$100 million, has demonstrated that MSE lending can be commercially sustainable in China. The project facilitated loans of less than 100,000 yuan (about US$15,459) to about 180,000 micro and small enterprise (MSE) borrowers and trained more than 1,100 credit officers. The lending technology was successfully replicated in rural finance. Thanks to the project’s demonstration effect, now more and more banks are turning to MSE lending.

Challenges

China has about 60 million MSEs, or 99 percent of the total number of enterprises. MSEs have great potential to contribute to GDP growth and job creation.  However, one major obstacle for MSE growth is lack of finance. In 2005, almost no banks in China lent to MSEs. Lending interest rates were controlled so that banks were not allowed to set higher rates to cover the associated costs and risks. Consequently few banks believed that lending to MSEs could be commercially sustainable. Nor did banks have the capacity and skills such as the credit risk assessment skill required, even if they wanted to lend to MSEs.

Recognizing the essential role of MSEs in the economy, the Chinese government had tried different ways to promote MSE finance, including fiscal subsidies, preferential tax treatments, risk compensation funds and credit guarantee schemes. Yet all these measures failed to achieve the desired sustainability and outreach.

Approach

The World Bank has been working with the Chinese government to promote MSE and rural financing since 2003, by adopting a strategy which combined policy dialogues to catalyze policy reforms and regulatory changes with financial and technical support to unleash commercially-oriented MSE lending by financial institutions.

In October 2004, lending rates were liberalized. In April 2005, the principle of commercial sustainability in MSE finance was embraced at an international seminar jointly held by the Bank with the China Banking Regulatory Commission (CBRC) and the People’s Bank of China (PBC).  A set of guidelines for MSE lending were issued by CBRC shortly afterwards. These paved the way for expanding credit flows to MSEs in the country.

To demonstrate that MSE lending can be sustainable, the World Bank joined hands with KfW, Germany’s development bank, to provide financial and technical support to the China Development Bank (CDB) to onlend loans to MSEs through participating banks.  12 banks were selected to participate in the project, and support was provided to develop their institutional capacity, systems, human resources and risk management skills to effectively engage in MSE lending. MSE lending technologies that had been developed and validated in some Eastern European and Central Asian transition economies were introduced. The objective was to lay a foundation for progressive, nationwide scaling-up of commercially-sustainable MSE financing services.

Results

The policy dialogues contributed to:

• Liberalization of lending interest rates in 2004;
• Regulatory changes to promote MSE lending in 2005.

The lending operation combined with capacity building assistance achieved the following results:

• Since the first MSE loan of 15,000 yuan in 2005, cumulative disbursements of MSE loans reached 18 billion yuan by the end of 2010, benefiting about 180,000 micro and small business borrowers, with average loan size below 100,000 yuan. 
• 1,108 qualified loan officers were trained, many of them recruited from outside the participating banks; 
• The average nonperforming loan ratio was kept below 1 percent；
• Some of the participating banks mainstreamed commercially-oriented MSE lending after graduation from the program. The best performing banks have become industry leaders in MSE financing；
• The project demonstrated that MSE lending could be safe and profitable if done properly.  Today many other banks in China are beginning to engage in MSE lending in a commercially-oriented fashion；
• MSE lending technologies have been successfully replicated in rural finance in selected participating banks.

Bank Contribution

The Bank engaged in policy dialogues with the government to catalyze interest rate reform and changes in regulatory framework to clear the way for boosting MSE lending;

A technical assistance loan of US$ 1 million was provided under the Technical Cooperation Credit 4 (TCC4) to strengthen CDB’s capacity in implementing the MSE Finance Project;

An investment loan of US$100 million was provided to CDB, consisting of US$95 million for on-lending to MSEs through the participating banks and US$5 million for technical assistance.

Partners

KFW provided a loan of US$50 million in addition to the credit facility and a grant from the German Government of 3 million Euros.

China Development Bank provided co-financing of about US$600 million as well as technical assistance to the participating banks.

Moving Forward

Thanks to the project’s demonstration effect, more and more banks are getting involved in commercially-oriented MSE finance. China has achieved a great deal in promoting MSE finance and the principle of commercial sustainability has taken root. The MSE lending technology has also been successfully replicated in rural finance.

Despite the initial success, there is still a long way to achieve the desired outreach and sustainability. Lack of capacity at all levels of banks, including management and credit officers, stands out as a major impediment, calling for a systematic approach to training and advisory services.

 In recognition of the bottle neck and vast demand for training and capacity building, the Bank has launched an initiative to create an academy for inclusive finance, with the objective to provide world class training and advisory services in lending technology, management and leadership skills to credit officers and managers. 

Beneficiaries

Chen Dezhi owns a small business in garment manufacturing in Taizhou, Zhejiang Province.  Like many MSEs, he had difficulty to access to bank lending in the past. “I learned from a friend that small loans from Taizhou Bank were available.  I went to apply without much hope in mind,” Mr. Chen said.  “To my surprise, the credit officer from Taizhou Bank contacted me right away and after investigation on site, the loan was disbursed to me.”

Sun Yingzhi has a grape vineyard in Maanshan, Anhui Province.  He called to apply for a loan from the Maanshan Rural Commercial Bank.  The credit officer visited him the next day to conduct on-site investigation.  A couple of days later, Mr. Sun received a message on his mobile phone informing him that his loan was approved. “I just called and they came to our door. It is very convenient. We have a big need for funds in our business.  Convenient and speedy disbursement of loans is a great help to us, “said he.

Baoshang Bank in Inner Mogolia is one of the 12 participating banks in the project. “Participating in the project is like a window opened for our bank, enabling us to take a fresh look at ourselves.  As a result, our operating performance has been greatly enhanced,” said Wang Huiping, President of Baoshang Bank.

“At the early stage of our MSE lending business, the senior management team made a point of sitting in the credit committee meetings to experience the different credit culture and new ways of lending.  You cannot expect to succeed in MSE lending without the buy-in of the management,” said Jin Hui, President of Maanshan Rural Commercial Bank, another participating bank in the project.

Talking about the training approach adopted in the project, Wang Weiwen, former Director of the Taizhou Bank’s MSE Lending Department noted: “In the past, our training was not very effective.   The new approach balances classroom lecturing with field practice, which cross-fertilize each other and improve trainees’ understanding of the issues. It is much more effective.”