Government Moves To Legitimize Underground Lending in Zhejiang

In Zhejiang Province, with the most developed private companies and private capital in China, the government is trying to legitimize private capital, and set up small-sum loan companies

The tight credit policy has driven many small and medium enterprises into hardship and even bankruptcy in coastal provinces like Zhejiang Province. Normally, formal banks, especially the state-owned banks, are reluctant to lend to private companies.

However, Zhejiang is also famous for its so-called underground banking, or back-alley banks as some analysts put it. The government has never issued lending licenses to them.

For some central bankers, like Wu Xiaoling, the former deputy governor of the People’s Bank of China, small-sum loans are an alternative under the current tight monetary policy in place in China.

So now Zhejiang is carrying out a pilot scheme for petty loan firms. If everything goes well, the first small-sum loan companies will start operations in September this year, and their experiences will help to set up more companies of this kind.

Zhejiang is the first province to react to the Guiding Opinions of the China Banking Regulatory Commission and the People’s Bank of China on the Pilot Operation of Small-Sum Loan Companies, which was released in May.

Wenzhou is the area richest in private capital in Zhejiang. In 2007 the amount of liquid private capital in Wenzhou totaled over 300 billion yuan, and the number has been growing at 14% every year. On this basis, the total liquid private capital in Zhejiang is estimated to be about 1 trillion yuan.

According to the notice released recently by the government of Zhejiang Province, the pilot operation for small-sum loan companies starts from July this year. These pilot companies will be allowed to carry out business from September or October. The government may increase the number of such companies in January 2009 if necessary.

During the pilot, every county (or district) of a city is allowed to set up a small-sum loan company. Four cities, including Hangzhou, Wenzhou, Jiaxing, and Taizhou will have five extra quotas, and Yiwu can have one extra quota. So the total number of pilot companies in Wenzhou will reach 16.

Compared with the regulations released by the China Banking Regulatory Commission and the People’s Bank of China, Zhejiang has raised the threshold for such companies. According to the notice of the local government, if the small-sum loan company is a limited liability company, the registered capital shall not be less than 50 million yuan (or 20 million yuan in less developed areas); and if it is a company limited by shares, the registered capital shall not be less than 100 million yuan (or 80 million yuan in less developed areas. During the pilot scheme, the maximum registered capital is 200 billion yuan (or 100 billion yuan in less developed areas).  

According to the regulations in Wenzhou, the registered capital of small-sum loan companies should all be in the form of money capital that has been fully handed in by investors or promoters up front: "The capital must be from the investors�own funds, and bank loans and funds raised from other channels are not allowed to be invested in these companies."

According to its regulations, Zhejiang is to set up over 100 small-sum loan firms, raising at least 5 billion yuan in private capital.

Encourage Development and Reinforce Supervision

The government has set strict limits for the establishment of small-sum loan companies in order to guarantee their development. According to the regulations in Zhejiang, investors in these loan companies should be chosen from private companies with regular management, sound credit, and are well-operated. The net assets of these companies should not be less than 50 million yuan (or 20 million yuan in less developed areas), and the asset liability ratio no higher than 70%. They should have made profits for three straight years and the total profits should be no less than 15 million yuan (or 6 million yuan in less developed areas).

The government has also banned these companies from collecting deposits or illegally raising funds from the public. Their loans should be dispersed to different businesses in small sums.

The Zhejiang local government will positively support the development of small-sum loan companies. Companies with regular operations and sound credit will have the chance to be transformed into rural banks.

The government will allow the loan companies with regular operations that are serving small businesses and rural areas well to expand their investment and shares one year after their establishment.