Sunday, Oct 26, 2014, 10:53 AM CST – China

Economy

Poverty Alleviation Loans

Lending to the Poor

To help with poverty alleviation, China is expected to let NGOs and the market play a bigger role in microfinance

Financial expertise is not on the list of requirements for prospective credit clerks at CFPA Microfinance. The company states very clearly: “Applicants should be married, 36 or older, with strong interpersonal skills. But most importantly, they must be local.”

Personal familiarity between credit clerks and their clients – often their neighbors – is one of the secrets behind the impressively low default rate at the now decade-old CFPA Microfinance, the only NGO that has been given the green light to issue favorable poverty-alleviation loans.

Having issued more than 5 billion yuan (US$821m) since its foundation in 2000, it has amassed 7 million yuan (US$1.1m) in bad loans – only 0.14 percent of its total lending volume. For China’s dominant “big four” State banks, the only other kind of organization permitted to offer poverty alleviation loans, these are enviable figures – their average bad loan rate stands at around 21 percent.

Besides good neighborliness, other strict risk control measures are also imposed – for instance, the lending data of individual creditors is monitored in real-time, and an alert is triggered when a creditor issues loans faster or slower than the normal rate.

A number of industry insiders told NewsChina that more NGOs, including microfinance companies, were likely to be given the go-ahead to deal with favorable poverty alleviation loans, as such organizations have proven to be more efficient and capable in this sector than State banks.

Small Deal

Run by the NGO China Foundation for Poverty Alleviation, CFPA Microfinance issued collateral-free loans directly to rural households at an interest rate of about 13 percent, with the upper limit set at 16,000 yuan (US$2,630) per farmer per loan. Its clients borrow less than 10,000 yuan (US$1,640) on average. As part of the State’s efforts to alleviate poverty, subsidies are offered on interest for those who borrow.

By the end of 2012, about 99 million of China’s rural population were living below the US$1 per day poverty line, most of whom have little access to financial services.

Money has continued to flow out of rural areas due to a lack of efficient financial institutions that are able and willing to serve farmers. According to the China Banking Regulatory Commission, over the period from 1994 to 2006, a total of 1.2 trillion yuan (US$197bn) drained from rural areas.

According to the a report by the People’s Bank of China, loans issued to rural areas accounted for only about 23 percent of the total lending over 2012, and only one quarter of lending in rural areas was directly to farmers.

Besides the insufficiency of loans, the high threshold and dauntingly complicated approval procedure also contribute to the hardship rural people experience when trying to secure a loan, according to Fan Xiaojian, director of the poverty relief office with the State Council.

State banks are still by far the biggest providers of poverty alleviation loans, but these loans are mostly funneled through various tiers of governments and invested into government-proposed infrastructure construction or programs such as planting or breeding projects, instead of being given to farmers and allowing them to decide how best to use it.

Duan Yingbi, director of the CFPA, said poverty-alleviation programs should no longer be conducted solely by governments themselves, and that private capital and market mechanisms must be introduced, given that governments usually lack risk control mechanisms and expertise and tend to allocate funds to projects that have little to do with poverty relief.

“We are serving the group of clients the commercial banks are unwilling or unable to serve,” said Liu Dongwen, CFPA’s chief manager.

In spite of its efforts, CFPA has only managed to issue loans to around 160,000 clients. The high expense of capital has limited the company’s expansion, according to Liu. Currently, it has to get loans from commercial banks and then re-lend to the farmers.

Microfinance institutions have yet to be officially acknowledged as financial organizations, a status that would enable them to receive inter-bank loans at much lower interest rates than their current major capital source: commercial loans. Since ineligibility for banking licenses prohibits microfinance companies from accepting deposits, they have no other funding options.

Good neighbors may make the best borrowers, but when it comes to poverty alleviation, no amount of neighborly goodwill can counter-balance China’s restrictive financial regulations. 

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