China has seen rapid growth in microcredit companies, with the number of them more than tripling from three years ago and their outstanding loans rising by 5.6 times, data from the central bank showed Monday, signaling the country's efforts to strengthen financial support for small firms.
The number of microcredit companies reached 7,086, with total outstanding loans rising to 704.3 billion yuan ($115 billion) by the end of June, up 8 and 10.7 percent from March, respectively, said the People's Bank of China (PBC), the country's central bank.
There were only 1,940 microcredit companies with outstanding loans of 124.8 billion yuan by the end of June 2010, according to the PBC.
"It signals that microcredit companies are playing an increasingly important role in financing small businesses nationwide," Du Xiaoshan, a professor and economist at the Rural Development Institute of the Chinese Academy of Social Sciences, told the Global Times Monday.
China's policymakers have promised to strengthen financial support for small private businesses that reportedly create eight out of 10 jobs in the country. The most recent financial guidance for micro and small firms was issued on July 25, encouraging various forms of funding to support this sector.
The financial authorities allowed the establishment of alternative financial institutions including rural banks and microcredit companies in 2008.
Microcredit companies have seen faster growth than rural banks. There are now 900 rural banks, with total outstanding loans of 200 billion yuan, Du said.
The robust growth of microcredit companies shows the huge demand for financing from small businesses in China, Bai Chengyu, secretary-general of the China Association of Microfinance, told the Global Times.
Currently, most commercial banks are not willing to lend to micro and small businesses in view of the higher costs and risks compared with lending to large State-owned enterprises.
To encourage financial support for small private businesses, the financial authorities allow microcredit companies to charge lending rates up to four times the official lending rates of commercial banks.
However, microcredit firms have a tiny share of the market compared with commercial banks, the total outstanding loans of which amounted to 68 trillion yuan by the end of June this year.
One of the major bottlenecks for microfinance companies is a lack of funding. They are allowed to grant loans, but are not permitted to raise funds through deposits.
Even in provinces such as Jiangsu and Zhejiang where banks are more willing to lend to them, microcredit firms are only allowed to borrow up to half of their registered capital from banks, Du said.
A recent trend has been for private equity firms to invest in microcredit companies, but this is not a long-term solution as private equity firms are concerned about the relatively low returns over a short period and the high risks of micro finance firms, Song Shaokui, a senior analyst at PE consulting firm ChinaVenture Group, told the Global Times Monday.
Other issues facing the sector are financial fraud and illegal fund raising, Du said.
East China's Jiangsu Province is a model for the rest of the country, Du said.
The local administration has set up an association for local microcredit companies with an information management system that records loans released by local microfinance firms, and caps the annual interest rate at 15 percent, which can control hidden risks, he noted.
Jiangsu has seen the fastest growth of microcredit firms over recent years, with the number of them rising to 529, and outstanding loans reaching 109 billion yuan by the end of June, 4.3 and 6 times the figures of three years ago respectively, official data showed.