Innovation essential to sustainable growth of microlending sector

Despite their inherently limited lending scales, microcredit companies are playing an important role in China's financial inclusion industry, analysts said.

However, the sector's sustainable development requires innovation among both companies and regulators, they added.

Microlenders specialize in providing small loans for borrowers such as small and microenterprises, and rural residents, who have difficulty securing loans from traditional banks because they lack collateral or credit records.

As of the end of September, a total of 8,332 microcredit companies in China registered an aggregate loan balance of 972.1 billion yuan ($141 billion). That is equivalent to only a tiny fraction of traditional banks' 66 trillion yuan loan balance relating to SMEs and the agricultural sector, according to official data.

Microcredit lenders' role in improving financial inclusion, however, is much more substantial than their proportion in lending balances, according to Mo Xiugen, research head of the Chinese Academy of Financial Inclusion at Renmin University of China.

"Many microenterprises without financial accounts were almost totally unable to access financial services in the past, but microcredit companies have improved accessibility," Mo said.

"The biggest contribution from microcredit lenders is their technological innovation," he said, as internet-based industry players, such as Ant Financial and JD Finance, have developed technologies to assess customers' credit based on big data analysis.

"With more innovation, microcredit companies could embrace significant growth," said Zeng Gang, director of banking research at the Institute of Finance and Banking of the Chinese Academy of Social Sciences.

But they do face challenges, Zeng said, giving the example of the intensified market competition, resulting from more commercial banks engaging in microlending.

Zeng advised microcredit lenders to transform their business models and to "cooperate with other institutions, such as internet enterprises and commercial banks, to integrate themselves into a larger and more vital ecosystem".

Among the microlenders exploring new business models is Dunxin Financial Holdings Ltd, a medium-sized financial group focusing its microcredit business on Central China's Hubei province.

The company plans to cooperate with Ant Financial, Alibaba's fintech giant, to personalize financial services for clients in the region, said its chairman Wei Qizhi at the 2018 International Forum for China Financial Inclusion in October.

Xiang Weiguo, head of the China Micro-credit Companies Association, said at the forum that unfavorable regulatory environments in terms of tax, financing and litigation have hindered the sustainable development of microcredit companies.

For instance, clients who refuse to repay loans may not be convicted of fraudulent borrowing, as microcredit companies are not seen as financial institutions by the law. Additionally, such companies' leverage ratios are capped at 50 percent as stipulated by the top regulators.

Mo from Renmin University of China called for a regulatory balance between boosting the industry and preventing risks. "Regulators should lift unnecessary limits, while keeping a close watch on the industry by supervising each transaction with the help of regulatory technologies," he said.