Reform urged for small-sum loan sector

Heavy tax is not the only constraint on the loan companies.

As ordinary companies, their leverage rate is very low, which means they can borrow much less money from larger lenders such as commercial banks.

Under the current system, a small-sum loan company could raise money from no more than two banks, with the amount no more than half of its net capital.

Neither can they take into account deposits, as banks can do.

According to Wu Xiaoling, former deputy governor of the People's Bank of China, the central bank, small-sum loan companies on average can get bank loans of only about 10 percent of their net capital, which brought down their return on equity to 7.3 percent in 2012.

"Most large commercial banks, as public companies, have strict rules on lending, including the size of a single loan.

"It is just unrealistic to expect them to be the saviors of most small and micro sized enterprises," Wu said.

"So it is crucial to foster the social financing sector, including small-sum loan companies."

As a deputy to the National People's Congress, Wu submitted a motion to the national legislature this year suggesting lowering the threshold and easing some of the limitations imposed on small-sum loan companies.

For example, small-sum loan companies could see their ceilings lowered and bank borrowing limits raised year by year, depending on their own results.

The ceiling could be lifted to 100 percent in the second year and 200 percent in the third year, she said.

In addition, small-sum loan companies are exposed to much higher legal risks than financial institutions.

If employees with small-sum loan companies commit fraud or breaches of contract, for example, they will not face criminal charges.

"In Wenzhou, loan relays are not uncommon. They have increased interest rates and stained the reputation of small-sum loan companies," said Zheng.

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