Small banks take initiative with small companies

When large Chinese banks remain reluctant to extend loans to small and micro enterprises (SME), smaller banks have already changed their way of thinking and have begun treating smaller businesses as important customers.

Furthermore, the small banks, including city and rural commercial banks along with some regional banks, are learning how to find customers which were once neglected by the traditional financial system.

Pressure to survive inspires new methods

China Minsheng Banking Corp Ltd, a national joint-stock commercial bank established in 1996 by a few non-State-owned enterprises, has realized an accumulative SME loan balance of 317 billion yuan from February 2009 to the end of 2012, according to the bank's website.

Bai Jing, general manager of the bank's section for small and micro enterprises said at the Micro Bank & Cloud Finance forum that his bank was forced to transform itself as it could not grow in traditional areas such as mortgage loans due to its status as a non-state-owned bank.

The two-day forum was co-hosted in Beijing beginning June 29 by the Guanghua Management School of Peking University and 9F Microfinance and Retail Banking Service Co Ltd, which helps banks restructure and improve marketing efficiency.

A total of 105 people from 49 small banks attended the forum to learn more about small and micro financing. The forum's attendees included 15 chairmen, and 25 bank presidents.

Bai said the bank has learned that it is good to look upon small and micro businesses and focus on small companies, which has been an effective strategy for Minsheng.

Bai said the company mainly develops their customers in business clusters or along industrial chains to make SME loans a wholesale business to lower the cost of each loan.

For example, the bank has provided loans worth 700 million yuan to many clothing wholesalers in the Bairong Clothing Market in Beijing and provided point-of- sales settlement services to these small businesses in the same market.

Mingsheng also carried out salary payments for Bairong Group which operates the clothing market.

In another style, Baoshang Bank, which was set up in Inner Mongolia in 1998, mainly develops its micro-level customers one by one, Duan Nan, general manager of the Micro Finance Department at the bank's Baotao branch, said on the forum.

The bank has 1,239 SME loan officers and has extended 70.4 billion yuan in loans as of 2005 to May 2013 and has earned 6.17 million yuan in interest.

Duan said the bank earned zero profit in the first two years from its small and micro finance pursuits but things have improved and SME loans have taken a larger part within its entire loan structure.

The regional bank extended 11.74 billion yuan in loans in the year 2011 with SME loans accounting for 40 percent and extended 8.57 billion yuan in loans in 2012 with SME loans accounting for 52 percent, Duan said.

Duan also added that the bank estimates its newly-added loans this year may amount to 8.4 billion yuan and SME loans could total 58 percent.

Hu Lan, general manager of the Credit Center for Small Companies at Longjiang Bank said at the forum that her bank mainly develops its customers according to the life cycle of different companies.

Longjiang Bank is a provincial commercial bank located in Northeast China's Heilongjiang province that was established at the end of 2009.

The bank, which has 30 branches and operates only in Heilongjiang province, has 192 SME credit officers and has already issued 18 billion yuan in SME loans.

Hu said that during their start-up period, his bank provided easy loans to small and micro companies and encouraged them to learn how to work with banks. During this growth period, the bank issued cheap loans to these small companies.

So when these companies mature, they will have an adequate financial record and will be able to contribute to the bank that has accompanied their growth, Hu added.

The bank also follows a "3688" rule which means the bank operates 365 days a year from 8:00 am to 8:00 pm..

"This work-hour extension has facilitated a lot of small and micro companies and has differentiated this bank from other banks, which has helped us build a good reputation,"

Controlling default risks

Duan Nan from the Baoshang Bank said the economic slowdown has had a larger effect on small and micro companies and the bad-loan rate for her bank is at two percent. The rate for Minsheng is 0.3 percent.

Setting the interest high enough to cover all risks has become a common option.

Baoshang sets its interest rate at 18 percent, while Mingsheng has set theirs at 15 to 16 percent.

Bai explained that small and micro businesses worry more about whether and when they can get the loan than how much the loan actually costs. Duan said Baoshang has the capability to issue a loan under 1 million yuan within three days.

In addition to high interest rates, Minsheng tries to extend as many loans as possible while making the credit line for each loan as small as possible, thus following the Law of Large Numbers in statistics, Bai said.

"If the bank extends a loan bigger than necessary, the micro company will transfer the amount of money to other areas such as real estate rather than their core business area. The average SME loan value has decreased from 1.8 million to 800,000 and may reach 500,000 later," Bai said.

Longjiang Bank's Hu Lan said it is during the beginning stages of the credit officer and micro company contact that is the best time for controlling risks.