SMEs scramble for funds from private lenders
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China Daily, July 29, 2011
Private lenders are charging up to 18 times the benchmark loan rate in Guangzhou, Guangdong province, with small and medium-sized enterprises (SMEs) finding it increasingly hard to get bank credit as a result of government tightening policies.
Annual private loan rates range from 72 percent to 96 percent, and in some cases up to 120 percent, in contrast to the 6.65 percent benchmark rate, according to a report in the Guangzhou-based Yangcheng Evening News.
Rates have almost doubled since end-March, the newspaper reported. It also said that many private lenders had seen business increase as much as 40 percent in the first four months of the year.
Even private lending firms themselves sometimes have to scramble for funds, pushing rates yet higher, said a manager with a private lending company, surnamed Pan.
"Judging from the situation, rates may go up further in the rest of the year. If you need to borrow, you'd better hurry," Pan said.
Another private lending company gets up to six clients a week, compared with one or two previously, its manager, surnamed Wang, said.
The corporate borrowing peak is usually at the end of the year, but it has come much earlier this time as many companies are having liquidity problems but can't borrow from banks, he said. More institutions are entering the private lending business, including investment consulting firms, credit guaranty firms, pawn shops and unlicensed micro-credit organizations, as the business offers returns of 40 percent to 50 percent.
Since the private lending sector is an opaque industry, it is hard to quantify, according to the Guangdong branch of the China Banking Regulatory Commission (CBRC).
However, the branch's figures shed some light on private lending in the province. It is most active in the cities of Dongguan, Foshan and Zhongshan.
Private lending in Dongguan is estimated at 200 billion yuan ($31 billion) to 300 billion yuan a year.
These aren't even the largest private loan markets: those in Zhejiang province are believed to be much bigger.
Outstanding private fundraising stood at 350 to 450 billion yuan in Guangdong in the first half, accounting for 7 percent of all outstanding loans in the province, a reasonable level, according to the Guangzhou branch of the People's Bank of China (PBOC), the central bank. The weighted average commercial bank loan rate in Guangdong was 6.44 percent in the first half, up 1 percentage point from a year earlier.
The weighted average rate in a sample of private lending to farmers was 17.45 percent in the first half, up 1.8 percentage points.
Wang said his business helps enterprises overcome financial difficulties and prevents some bad loans at banks.
However, charging more than four times the PBOC's benchmark rate is illegal.
Persistent high loan rates could have serious consequences, eroding companies' profits and even driving them out of business, said Li Youhuan, a researcher with the Guangdong Academy of Social Sciences.
The high returns of private lending also attract more companies into the business, which may create bubbles, Li said.
Also, the law doesn't deal with the risks of private lending, so disputes are difficult to resolve, said Lu Jun, the dean of Lingnan College's finance department at Sun Yat-sen University.
CBRC Chairman Liu Mingkang called earlier this month for vigilance on the risks of private lending, online lending and small-scale lenders, and pledged more financial support to SMEs.
Guangdong banks allocated nearly 60 percent of their new loans to SMEs in the first half, said the PBOC's Guangzhou branch.
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