Access to Finance Microfinance Innovations in the People’s Republic of China The People’s Republic of China (PRC) has adopted a more market-oriented approach by promoting rural microfinance, pursuing bottom-up innovations such as group lending, various forms of guarantees, new financial products based on purchase orders and insurance policies, and better incentives for agriculture funding from financial institutions. In 2009, the PRC sought the assistance of the Asian Development Bank to study how to optimize policy choices in rural finance using both top-down and bottom-up approaches. This report presents the findings of that rural microfinance study, including valuable lessons learned from several pilot microlending programs conducted in selected provinces in the PRC. It then analyzes outstanding issues in the country’s rural and microfinance markets that need to be addressed more vigorously. About the Asian Development Bank ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to help its developing member countries reduce poverty and improve the quality of life of their people. Despite the region’s many successes, it remains home to approximately two-thirds of the world’s poor: 1.6 billion people who live on less than $2 a day, with 733 million struggling on less than $1.25 a day. ADB is committed to reducing poverty through inclusive economic growth, environmentally sustainable growth, and regional integration. Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance. ACCESS TO FINANCE MICROFINANCE INNOVATIONS IN THE PEOPLE’S REPUBLIC OF CHINA ASIAN DEVELOPMENT BANK 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines ASIAN DEVELOPMENT BANK www.adb.org ACCESS TO FINANCE MICROFINANCE INNOVATIONS IN THE PEOPLE’S REPUBLIC OF CHINA ASIAN DEVELOPMENT BANK © 2014 Asian Development Bank All rights reserved. Published in 2014. Printed in the Philippines. ISBN 978-92-9254-857-5 (Print) 978-92-9254-858-2 (PDF) Publication Stock No. RPT135633-2 Cataloging-in-Publication Data Asian Development Bank. Access to finance: Microfinance innovations in the People’s Republic of China. Mandaluyong City, Philippines: Asian Development Bank, 2014. 1. People’s Republic of China. 2. Microfinance. 3. Finance. I. Asian Development Bank. The views expressed in this publication are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. By making any designation of or reference to a particular territory or geographic area, or by using the term “country” in this document, ADB does not intend to make any judgments as to the legal or other status of any territory or area. ADB encourages printing or copying information exclusively for personal and noncommercial use with proper acknowledgment of ADB. Users are restricted from reselling, redistributing, or creating derivative works for commercial purposes without the express, written consent of ADB. Note: In this publication, “$” refers to US dollars. ADB recognizes “China” as the People’s Republic of China. 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines Tel +63 2 632 4444 Fax +63 2 636 2444 www.adb.org For orders, please contact: Public Information Center Fax +63 2 636 2584 [email protected] Contents Tables and Figures v Foreword vi Acknowledgments vii Abbreviations viii Rural Financial Innovation in the People’s Republic of China 1 Rural Financial Reform 1 Pre-reform Rural Financial Markets and Rural Financial Institutions 2 Reforms Since 2005 and Their Outcomes 3 Unresolved Issues 6 Rural Financial Regulation and Supervision 8 Introduction 8 Rural Financial Markets 9 Urgent Need for Improving Financial Supervision in the Rural Areas 11 Factors that Impede Supervision 12 Recent Efforts to Introduce Innovations in Rural Financial Regulation and Supervision 13 Issues Needing Further Study 15 MSE Finance 17 Introduction 16 Micro and Small Enterprise Financing in the PRC 19 Causes of SME Financing Difficulties and Possible Solutions 22 Relationship Lending 24 Bank Lending Techniques 25 Bank Organization for Small-Enterprise Financing 27 Two Business Models for Small-Enterprise Financing 28 Findings of the Field Survey 31 Pilot Implementation of the IPC Model in the PRC 32 Conclusions 40 Financing the Agricultural Value Chain 42 Introduction 42 Chanyehua and Financial Support 44 Cooperative Financing 49 Agricultural Value Chain Financing 55 Problems for Further Study 61 NGO Microfinance: The Case of CFPA Microfinance 63 Development of CFPA Microfinance 63 Management of CFPA Microfinance 65 Loan Products and Processing 69 Management of Loan Officers 75 iii iv Contents Staff Training 75 Analysis and Conclusions 76 Recommendations 78 Village Development Mutual Aid Funds: The Case of Sichuan 81 Introduction 81 Field Surveys and the Implementation of the Village Development Mutual Aid Fund Pilot Projects 85 Poverty Targeting 91 Sustainability 95 Conclusions and Recommendations 98 Lessons and Future Directions 100 Summary 100 Policy Recommendations for Further Reforms 101 Lessons 107 References 109 Tables and Figures Tables 1 Regulated Rural and Microfinance Institutions in the PRC, as at the end of 2012 4 2 Performance of RCCs and New RFIs in the PRC 2010–2011 4 3 The Total Loan Portfolio and Nonperforming Loans for Commercial Banks in (2010–2012) 4 4 The Development of Nonbanking Microloan Institutions in the PRC 2012 5 5 The Classification of Enterprises in the PRC, by Industry 20 6 World Bank Definition of Micro, Small and Medium-Sized Enterprises 20 7 A Summary of Surveys on Credit Demand, Channels and Loan Conditions 20 8 Comparison between Hard Information and Soft Information 25 9 Comparison of Loan Technique Classification of Western Banks 26 10 Major Events with Project Implementation 33 11 Project Results as Compared to Targets 2006–2010 34 12 Breakeven Months Required for Partner Financial Institutions 35 13 The Lending Interest Rates and Cost Structure for Microloans by the 6 Partner Financial Institutions (Unit: percentage of the loan portfolio) 35 14 Mianzhu Branch Loan Products (Business Loan and Housing Loan) 71 15 Individual Loan Approval and Disbursement Processes 72 16 Basic Data on the Four Villages Surveyed 86 17 Number of Persons Interviewed in the Four Villages 86 18 Details of Village Meetings in the Four Villages Surveyed 88 19 Management Committee Structure in the Four Villages Surveyed 89 20 Provisions of Management Charters of the Four Villages Surveyed 90 21 Status of Village Development Mutual Aid Funds in the Four Villages Surveyed 91 22 Loan Applications and Approvals in the Four Villages Surveyed 92 23 Cropping Input and Output in the Four Villages Surveyed 93 24 Livestock-Raising Input and Output in the Four Villages Surveyed 93 25 Three Major Nongovernment Microcredit Programs in the PRC 94 Figures 1 Organizational Chart of CFPA Mirofinance 66 2 Authority Structure of the Village Development Mutual Aid Fund 88 v Foreword rom the early 1990s to 2005, the People’s Republic of China (PRC) used a top–down approach to rural finance and microfinance reform and development. The top level F policy issues were largely the focus and market issues at the micro level received little attention. This approach could not have sustainable results. Since 2005, the government has therefore taken a more market-oriented approach and promoted institutional reforms in the sector. This study was conducted by the Asian Development Bank (ADB) for the People’s Bank of China in support of the government’s inclusive growth and balanced development agenda. Using case studies, it identifies and advocates innovations to improve the sustainability of rural finance and microfinance institutions. The study is a sequel to Rural Finance in Poverty- Stricken Areas in the People’s Republic of China, which was published in 2010. Several unresolved issues in the PRC’s rural finance and microfinance markets are analyzed on the following pages. While more players have entered the markets in recent years, competition among institutions that lend to rural households and microentrepreneurs in most parts of the country is still lacking. The financing outreach to rural households and microentrepreneurs also remains far from adequate, and many small farmers, rural households, and businesses face serious credit constraints. Instead of simply being a poverty reduction tool, rural microfinance has to be used as a sustainable, innovative tool to empower rural agricultural communities, as well as micro and small enterprises in both the rural and the urban areas. ADB has partnered with the PRC’s financial regulatory agencies in developing rural finance and microfinance over the past 20 years, and that partnership continues to this day. With this study, ADB hopes to contribute once again to a better understanding of the sector and to encourage policy makers to pay greater attention to market realities in developing policies. Ayumi Konishi Director General, East Asia Department Asian Development Bank vi Acknowledgments iaofei Jiang, operations coordination specialist, East Asia Department of the Asian Development Bank (ADB), coordinated the contributions of the