U-Bankers

So the Chinese government is revising laws to legalize underground banks. At least, legalize the lending business (foreign exchange is a different story, the government won’t let that one go for the time being). So what is the problem with their existing banking system? What can some of these underground banks do that the big banks can’t?

For one thing, its credit rating is tracking the wrong dude. The current system only tracks credit history of companies. Under this system, any average Joe can work the magic: creat a few companies and shuffle money around them – the goal is to make some of them credit-worthy at the expense of the other ones. Once you have built up a basket of beautiful apples, you have got your loancow (like cashcow of loans), and you may throw out (default) the bad lemons.

But the state banks are not stupid; they know this trick by heart too. Consequently, they don’t lend to your company unless they know you, or they know somebody who knows you. So hence a vague individual credit rating system. However, the network of who-knows-who does not help most of the smaller name, SMEs entrepreneurs, especially in the rural area where developments have lagged behind.

In turn, these SMEs entrepreneurs look to the savior - the informal underground banks (Check Here).

Some of these underground banks are actually more visible than you think. These U-Bankers often know the SMEs entrepreneurs well, both run business in the same industry and they likely have extended loans to the entrepreneurs in one form or another (think of a supplier-and-buyer relationship). Most importantly, U-Bankers have far better information on prospect customer’s ability to make payments.

As a case study, 奧康集團, a shoe maker from Wenzhou has set up a 1.5 billion loan company with state bank’s help and finance - 永嘉瑞豐 - (Check Here), and all of the 1.5 billion loans was ditched out three month after the company was set up.

I do not have a list of 瑞豐‘s customers. But I would bet those who borrowed from the pool of 1.5 billion were the shoe maker’s suppliers, business affiliates and the likes.

What is amazing is that I think a semi loan-bank like 瑞豐 will actually make a formidable profit. It charges a monthly interest rate of 10.2% to 23.1%, this is 122% annually! ((Check Here)) And, this is legal.

But, what if these loans are extremely risky therefore a loan shark-like interest rate is justified.

Sure, that could be the case, and I am no risk management expert. But, if my assumption was true, and that 瑞豐 only makes loans to those who it knows well and has credit information of, then the default risk could be mitigated somewhat. At the end of the day, 瑞豐 is operating with an on-paper yield of 122% and up, so they should have some appetite for risk.

So there you go, who would think some shoe maker out of a rural town in China has suddenly set foot in the high risk, high return venture capital funding business. Thanks to China’s out-dated banking system.