China's Shifting Microfinance Landscape: New Players, Old Problems

In light of his observations, Giehler gave several recommendations for the bank's future direction. While marketing new microloan products to new customers is one option, he said, that is a strategy that its competitors will also be following. The PSBC, however, has the opportunity to attract microfinance clients by offering new products to its pre-existing customer base.

"First, you offer an overdraft on the savings and current account," he proposed. "And then later on, you can customize this kind of credit progress." Credit cards are a further option for the PSBC to consider. It is also possible to link microinsurance to microcredit, he noted.

An ABC Comeback?

It is possible that the PSBC may find competition from a source that has been discounted by many. Like the RCCs, the Agricultural Bank of China (ABC), another traditionally significant player in rural finance, has found profits hard to come by in the rural market, and in the process became saddled with large nonperforming loans.

In recent years, the ABC has followed the big commercial banks and began focusing on urban areas, pulling back from rural areas. Indeed, there has even been speculation that the bank might withdraw from the rural credit market altogether in advance of an expected IPO in 2008.

However, taken at face value, remarks made at the conference by a high-ranking ABC official appeared to quash these rumors. The official noted that the central government has directed the bank to focus on "agriculture, farmers and rural development." Targeting the countryside, instead of attempting to do battle with big commercial banks in big cities, is "fully justified," he said, observing that the international giant HSBC is moving in the same direction.

Nevertheless, he warned that the bank cannot simply transfer urban business models to the countryside: Innovative offerings matched to farmers' needs will be key. To this effect, the bank will be launching a microcredit credit card which will provide for Rmb [Chinese currency] 8,000-10,000 in credit. The official added that, following the reduction of its rural presence in recent years, recruitment and training at rural branches will be another priority. The bank is also planning to add an additional 6,000 ATMs at the county level by 2010, while making other improvements to its rural services.

Tsinghua's Wang Jun welcomed the bank's strategy statement, adding that the bank's urban drift has not played to its traditional strength in rural areas. Nevertheless, he said that obstacles remained for the bank's return in force to the rural market, partly due to the poor demarcation of policy-oriented and commercially oriented lending, as noted above.

Demanding Problems

In addition to these supply-side complications, the conference delegates discussed problems on the other side of the supply-and-demand equation, in particular the trickiness of measuring exactly how much demand for microcredit there is in the countryside.

A central bank official explained how the inefficiencies of the existing system make measuring demand a conundrum. Due to artificially low interest rates, microcredit demand among the poorest farmers may not reflect actual productive demand, said the official, but rather demand for poverty relief. This is especially the case in western China, she noted, where incomes are lowest.

In addition, other speakers suggested that in many cases rural residents use loans for nonproductive purposes, like healthcare, education, residential construction or even weddings. Furthermore, as interest rates for microcredit are not yet liberalized, excessively low interest rates may lead to artificial demand. Several speakers also pointed to the necessity of providing collateral for loans as a complicating factor that exacerbates the difficulty of measuring demand.