The conference speakers and panelists focused on the microcredit company (MCC) model of microfinance in terms of how to make the model more profitable and thereby encourage investment. According to the Research Bureau of the PBoC, as of December 31, 2009 there were 1,334 MCCs employing 14,574 people across 28 provinces. The total balance of capital source (capital allocation) was RMB 94.086 billion (approximately USD$13.836 billion) and total balance of loans equaled RMB 76.641 billion (approximately USD$11.271 billion). The PBoC also provided a list of the MCCs broken down by provinces and autonomous regions:

 

Province	Number of MCCs
Inner Mongolia	149
Hebei	133
Zhejiang	98
Anhui	98
Shanxi	85
Jiangsu	84
Liaoning	83
Guangdong	63
Yunnan	53
Jilin	52

 

 

The biggest limitation on MCCs in China stems from the fact that they are commercial companies and not financial institutions. This imposes a number of restrictions on MCCs and as a result, there are growing perceptions of a non-level playing field for different types of local-level credit-issuing entities that include MCCs, Rural Credit Cooperatives, Village and Township Banks, City Commercial Banks and other local institutions.

 

For example, while RCCs are able to get wholesale loan funding from the PBoC, MCCs may only be funded by debt or equity, both much more expensive options. Furthermore, currently a MCC’s debt cannot be more than 50% of the total registered capital, meaning it cannot have a debt/equity ratio greater than 0.5x. Although the PBOC and CBRC have recently expressed intentions to ease this limitation, due to various constraints (such as the banks’ unwillingness to lend, or stringent requirements for bank loans) the collective MCCs are not even close to this limit; according to GTZ, the original seven pilot MCCs have a debt/equity ratio of only 0.01x. Compared to the worldwide MFI average of 3.2x, or the Asian MFI average of 2.0x debt/equity, this number (as well as the new hypothetical max of 2.0x debt/equity) is very low. But, even more alarming is this number in comparison with the debt/equity ratio of all Chinese City Commercial Banks (30x) or RCCs (20x)[1].

 

Also, unlike financial institutions, MCCs are not able to collect deposits and utilize a much cheaper source of funding. As RCCs and other financial institutions are able to charge lower interest on loans as a result of having cheaper financing costs, MCCs are forced to lower their pricing in order to stay competitive. Without a level playing field for the different models, MCCs are not able to sustain profitable operations – a main point of concern for outside investors.

 

Speakers voiced opinions over what other changes should be made to the MCC model, including the removal of interest rate caps (which the PBOC and CBRC have already recently announced possibly removing – although MCCs are not even reaching the current 4x base lending rate limit because of the issues discussed above), the removal of geographic limitations and implementing preferential tax treatment for MCCs. There were also calls for increased regulation and government support. From an investor point of view, it is especially important for local regulators to define what exactly “microfinance” means in the context of these MCC companies: current loan sizes from “microfinance” institutions in China can range from anywhere between RMB 2,000 to RMB 3 million (approximately USD$294 to USD$441,176).

 

Other topics discussed at the conference included developing the Chinese microfinance sector through the training and education of MFI employees, the difficulty for even experienced international banks and MF organizations to invest in Chinese MF due to elevated capital asset requirements, and the difficulties faced by investors in trying to obtain transparent information on the industry.

 

PlaNet Finance China’s Executive Director Gabrielle Harris gave a presentation on the importance of technical assistance in allowing MFIs and other financial institutions to balance risk, efficiency, and costs in order to maximize profitability and social impact. She also introduced to the audience Planet Finance Group’s own investment fund, PlaNis, as an experienced microfinance player that has already entered the Chinese market with a small loan to an MFI in Gansu province.

 

The investor conference not only provided an overview of the status quo and prospects of the Chinese microfinance industry, but more importantly, it served as an arena where institutions and industry players had the opportunity to voice concerns to the media and regulators, share ideas, and build networks.

 

Executive Director Gabrielle Harris presentation "Technical Assistance: The 'Balancing Act' to Maximize Profitability and Social Impact"

 

Microfinance Industry Support Providers: (Clockwise) Patrick Eamon Scullin of Fern Software Company, Marco Boa of MicroFinanza Rating, Ding Jie of Beijing Sino-German Microfinance Consulting Co., Ltd, and Gabrielle Harris of PlaNet Finance China

 

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