Business is good, but loan defaults are up and authorities are clamping down
By Grace Ng 27 February 2009
It is the best and worst of times for underground banks in China.
The economy may have slowed down, but business has picked up for Cheap-rate Loans - an outfit run by a lender who gave his name only as Li.
‘We get twice as many enquiries for loans now than before,’ he said.
Mr. Li’s business had already been on a roll during the economic boom years, when he made good money charging an average 3 per cent interest per month on loans of ‘200,000 yuan and more’.
Like the tens of thousands of online and back-alley lenders across China, Mr. Li served mainly blue- collar workers, entrepreneurs and small companies seeking cash to renovate homes, build a new farm, or punt the stock and foreign exchange markets.
But with this downturn, Mr. Li is changing tack - he makes loans of at most 10,000 yuan (S$2,200) each, and only to customers who pledge houses or cars as collateral, in order to protect himself from default risks. Interest rates have also been jacked up to 8 per cent every month in some cases.
Indeed, the economic slowdown has fuelled a roaring business for informal ‘bankers’, who lend to cash-strapped entrepreneurs and individuals which state-owned banks are leery of.
But the risks are also higher. Loan defaults are on the rise, and making big profits may attract the attention of sharp-eyed officials clamping down on suspicious underground activity.
Mr. Li clammed up when asked about these risks. But his secrecy over his business - even its location is not stated in his terse online advertisements - is hardly surprising, given the growing number of raids that the government has conducted on grey market lenders.
Last week, top foreign exchange regulator Deng Xianhong pledged that the authorities will redouble efforts this year to target underground banks, particularly those linked to gambling, money laundering and illegal foreign exchange.
The growing scale of underground banks is a threat to China’s financial stability, he noted.
Indeed, underground banking transactions could total well over US$150 billion (S$229 billion), or over 4 per cent of China’s gross domestic product, analysts estimate.
The actual number of unlicensed lenders remains a mystery. Underground banks come in all shapes and sizes: sophisticated syndicates of financiers who count even listed companies and state-owned enterprises among their clients; the hui, loosely translated as the ‘coming together’ of family members, friends or deep-pocketed money-changers who pool their spare cash to make loans; and loan sharks who hawk their services through official-looking corporate websites.
Last month, the Chinese authorities announced that more than 40 major illegal banks in three provinces had been busted from July to November last year. These banks were involved in illegal deals amounting to more than 100 billion yuan.
Among the most spectacular cases so far was the crackdown on a Singapore company based in Shanghai in 2006. The company, which offered remittance and foreign exchange services in 25 cities, funnelled some 5.3 billion yuan over two years. Three Singaporeans were sentenced to jail terms ranging from nine to 14 years, and later deported.
Still, the vital role that small-sum loan companies play in providing the private sector with access to credit has been widely acknowledged, even by central bankers like former deputy governor of the People’s Bank of China Wu Xiaoling.
For decades, underground banks like the hui have helped to grease the wheels of commerce, lending to people they know or those referred to them by trusted contacts. Some rely on a gentleman’s agreement or contracts scribbled on paper.
But today’s underground banking behemoths have gone high-tech. They adopt modern risk management tools used by major banks and create Internet databases tracking their clientele, according to a Hong Kong-based banker familiar with some syndicates in Wenzhou - the most enterprising region in eastern Zhejiang province - and in Shenzhen, two major underground banking hubs.
Traditionally, default rates have been very low: ‘It’s a matter of honour to repay your relatives, or a matter of life and death to repay the loan sharks,’ noted Shenzhen clerk Xiao An, who had borrowed 5,000 yuan from a hui for ‘urgent personal matters’ and returned ‘every penny within a few months’.
A survey of five lenders’ rates showed that they charged interest rates from 12 per cent to as much as 50 per cent a year.
But some underground banks are now voluntarily lowering their rates and cleaning up their books to qualify for licences to operate as legal banks, reported the Nanfang Daily newspaper.
To stimulate lending to rural enterprises, China recently began experimental reforms to legalise three banks in Wenzhou and may extend this to other provinces.
The government is taking steps to ease credit to private sector enterprises amid the economic downturn to help stimulate growth, noted Mr. Xie Dongming, OCBC Bank’s China economist. ‘Bringing the underground banking sector into the open may help,’ he said.
Under the new regulations, companies and individuals will be allowed to extend loans if they do not have bad credit or criminal records.
But analysts say issuing licences alone is unlikely to legalise the entire underground banking industry as a large number of informal lenders, such as the hui and loan sharks, are unlikely to meet the requirements, such as basic capital and transparency in their accounts.
Some lenders may also not want to be regulated by the government as it may mean a cut in their profits: licensed lenders cannot charge more than four times the rates of the state banks.
Indeed, such reforms may well spell an end to the good times for grey market lenders like Mr. Li, who already feels that running this business ‘is like walking on thin ice’.
1 comment:
Woes of grey market lenders
Business is good, but loan defaults are up and authorities are clamping down
By Grace Ng
27 February 2009
It is the best and worst of times for underground banks in China.
The economy may have slowed down, but business has picked up for Cheap-rate Loans - an outfit run by a lender who gave his name only as Li.
‘We get twice as many enquiries for loans now than before,’ he said.
Mr. Li’s business had already been on a roll during the economic boom years, when he made good money charging an average 3 per cent interest per month on loans of ‘200,000 yuan and more’.
Like the tens of thousands of online and back-alley lenders across China, Mr. Li served mainly blue- collar workers, entrepreneurs and small companies seeking cash to renovate homes, build a new farm, or punt the stock and foreign exchange markets.
But with this downturn, Mr. Li is changing tack - he makes loans of at most 10,000 yuan (S$2,200) each, and only to customers who pledge houses or cars as collateral, in order to protect himself from default risks. Interest rates have also been jacked up to 8 per cent every month in some cases.
Indeed, the economic slowdown has fuelled a roaring business for informal ‘bankers’, who lend to cash-strapped entrepreneurs and individuals which state-owned banks are leery of.
But the risks are also higher. Loan defaults are on the rise, and making big profits may attract the attention of sharp-eyed officials clamping down on suspicious underground activity.
Mr. Li clammed up when asked about these risks. But his secrecy over his business - even its location is not stated in his terse online advertisements - is hardly surprising, given the growing number of raids that the government has conducted on grey market lenders.
Last week, top foreign exchange regulator Deng Xianhong pledged that the authorities will redouble efforts this year to target underground banks, particularly those linked to gambling, money laundering and illegal foreign exchange.
The growing scale of underground banks is a threat to China’s financial stability, he noted.
Indeed, underground banking transactions could total well over US$150 billion (S$229 billion), or over 4 per cent of China’s gross domestic product, analysts estimate.
The actual number of unlicensed lenders remains a mystery. Underground banks come in all shapes and sizes: sophisticated syndicates of financiers who count even listed companies and state-owned enterprises among their clients; the hui, loosely translated as the ‘coming together’ of family members, friends or deep-pocketed money-changers who pool their spare cash to make loans; and loan sharks who hawk their services through official-looking corporate websites.
Last month, the Chinese authorities announced that more than 40 major illegal banks in three provinces had been busted from July to November last year. These banks were involved in illegal deals amounting to more than 100 billion yuan.
Among the most spectacular cases so far was the crackdown on a Singapore company based in Shanghai in 2006. The company, which offered remittance and foreign exchange services in 25 cities, funnelled some 5.3 billion yuan over two years. Three Singaporeans were sentenced to jail terms ranging from nine to 14 years, and later deported.
Still, the vital role that small-sum loan companies play in providing the private sector with access to credit has been widely acknowledged, even by central bankers like former deputy governor of the People’s Bank of China Wu Xiaoling.
For decades, underground banks like the hui have helped to grease the wheels of commerce, lending to people they know or those referred to them by trusted contacts. Some rely on a gentleman’s agreement or contracts scribbled on paper.
But today’s underground banking behemoths have gone high-tech. They adopt modern risk management tools used by major banks and create Internet databases tracking their clientele, according to a Hong Kong-based banker familiar with some syndicates in Wenzhou - the most enterprising region in eastern Zhejiang province - and in Shenzhen, two major underground banking hubs.
Traditionally, default rates have been very low: ‘It’s a matter of honour to repay your relatives, or a matter of life and death to repay the loan sharks,’ noted Shenzhen clerk Xiao An, who had borrowed 5,000 yuan from a hui for ‘urgent personal matters’ and returned ‘every penny within a few months’.
A survey of five lenders’ rates showed that they charged interest rates from 12 per cent to as much as 50 per cent a year.
But some underground banks are now voluntarily lowering their rates and cleaning up their books to qualify for licences to operate as legal banks, reported the Nanfang Daily newspaper.
To stimulate lending to rural enterprises, China recently began experimental reforms to legalise three banks in Wenzhou and may extend this to other provinces.
The government is taking steps to ease credit to private sector enterprises amid the economic downturn to help stimulate growth, noted Mr. Xie Dongming, OCBC Bank’s China economist. ‘Bringing the underground banking sector into the open may help,’ he said.
Under the new regulations, companies and individuals will be allowed to extend loans if they do not have bad credit or criminal records.
But analysts say issuing licences alone is unlikely to legalise the entire underground banking industry as a large number of informal lenders, such as the hui and loan sharks, are unlikely to meet the requirements, such as basic capital and transparency in their accounts.
Some lenders may also not want to be regulated by the government as it may mean a cut in their profits: licensed lenders cannot charge more than four times the rates of the state banks.
Indeed, such reforms may well spell an end to the good times for grey market lenders like Mr. Li, who already feels that running this business ‘is like walking on thin ice’.
Post a Comment