The Chinese government for years has been urging banks to lend more to small and private businesses. Progress has been slow but success stories are emerging to show that the policy is gaining traction.

TopXGun Robot, a startup offering unmanned aerial vehicle flight controller system and application solutions, is a case in point.

The Shanghai-based company was badly in need of cash last year to expand its business. Getting a loan from the big state-run banks was nigh unto impossible because startups like TopXGun don’t have the collateral and profit track records that reduce risk in a loan application.

Enter Shanghai Huarui Bank, a smaller lender and one of the first privately owned banks in China. Huarui loaned TopXGun 15 million yuan (US$2.17 million) at an interest rate of 5.55 percent under an “investment and loan linkage plan.”

The benchmark rate at that time for loans with a term for six months was 4.35 percent, which means Huarui granted the loan to TopXGun at 1.2 percentage points above the benchmark rate.

China has long regulated benchmark rates for deposits and lending, which are in turn widely used by commercial banks as the basis of pricing for their financial products.

For lending to small businesses, banks will usually charge between one and five points above the benchmark rate, depending on the borrower’s credit record, an industry insider told Shanghai Daily.

Investment and loan linkage plans, such as the loan to TopXGun, allow creditors to take equity and give them rights to provide financial advice to borrowers.

Unlike the conventional practice of evaluating a company’s collateral and financial statements, Huarui does a comprehensive analysis of an enterprise’s management team, business model and the value of its core technology, among other factors.

“Thanks to Huarui, we are able to tide ourselves over difficulties,” said Zhang Yu, founder of TopXGun Robot.

Established in 2015, Huari boasts that it is a leading lender to small, private companies. Loans to private businesses accounted for two-thirds of its corporate lending as of the end of last October.

Leading lenders

Money is a key factor in the success of startups. Many young entrepreneurs think that a brilliant idea will automatically carry a company. Then reality sets in. Management, marketing, office rent, supplies and employees all cost.

About 80 percent of 90 million small enterprises and startups don’t have a credit line with a bank, according to WeBank, the country’s first digital private bank, founded by Internet giant Tencent along with several other companies.

To address the funding gap, the central government in February began rolling out a series of new initiatives to give private firms better access to capital.

Premier Li Keqiang, at a State Council meeting in April, said it is imperative to take a multi-pronged approach to easing the financing woes of small and medium-sized companies and to give banks the incentives to strengthen their “confidence, readiness and capacity lending” to small enterprises.

Following his call, the People’s Bank of China, the central bank, announced it would cut the reserve requirement for rural commercial banks from May 15, estimating the step would inject 280 billion yuan into the banking system, which in turn could be loaned to small firms and private companies.

Chinese financial technology companies and other Internet finance service providers spotted small firms as a huge lending potential even before government actions. WeBank and Alibaba-backed online lender MYbank are the two leading competitors.

Using their massive user payment and social network data bases, the two lenders have ready access to information on loan applicants and can provide 24-hour service through their digital, branchless banking operations.

In late 2017, WeBank launched an online loan product for small companies in the southern Chinese technology hub of Shenzhen.

More than 200,000 clients were reported to have signed up in less than a year. The bank said nearly half of those clients are in the manufacturing and high-tech sector.

Clients could apply for up to 3 million yuan in credit online without any collateral or other guarantees, and they had access to the funds within 15 minutes, according to WeBank’s website.

It’s not only small businesses that find this kind of service helpful. Liu Jinfang, manager of Tianjin Huacheng Linfeng Wood Industry Co, the largest pallet-packaging company in northern China, told Shanghai Daily that he prefers to turn to WeBank for loans because of its quicker application process and flexible repayment schedules.

“You can apply for loans on your mobile phone and make the repayments anytime, which save on funding costs,” Liu said, “It is much simpler and more flexible, compared with traditional banks.”

He added that WeBank’s affiliation with Tencent gives him added assurance.

Liu admitted, however, that the online lender’s interest rate is a bit higher — a situation he hopes will narrow in future.

“After all, the money you borrow has to be repaid,” he said.

WeBank’s website claims the interest rate for its lending product to small companies is as low as 0.01 percent per day. The low rate is a short-term promotion for companies deemed to be “quality” borrowers, the bank said.

In 2018, about 66 percent of WeBank’s corporate customers who received credit said it was their first successful loan transaction with a bank and over two-thirds had operating income of less than 10 million yuan, WeBank said in its recent annual report.

Hangzhou-based MYbank’s core advantage lies in its popularity with small firms and e-vendors on Alibaba platforms such as Taobao and Alipay. Its stated goal is to provide affordable banking services “not for the rich, but for the little guys.”

The Internet bank, an affiliate of Ant Financial Services Group, provides loans of up to 1 million yuan without collateral to small offline merchants based on their creditworthiness. It also offers unsecured loans of no more than 500,000 yuan to farmers and small business owners in rural areas.

At the end of 2018, MYbank had served 12.27 million small firms and private business owners, with an average outstanding loan of 26,000 yuan, according to its annual report for 2018.

‘Controllable risk’

The lender described its credit risk as “generally controllable,” with a non-performing loan ratio of 1.3 percent at the end of last year.

MYbank said it has adopted various measures to identify, analyze and control risks when granting small loans.

For example, it resorts to the cloud-based Big Data system to evaluate credit history and other lending factors.

Faced with these new challenges from technology-related companies, traditional banks are seeking to transform their own business models and adopting more advanced technologies.

Shanghai Rural Commercial Bank is one of banks adapting to the new reality. The lender offers both loan and consultancy services. It plans to extend at least 200 billion yuan in credit to private enterprises and small companies within the next three years, according to bank Deputy Party Secretary Gu Jianzhong.

At the end of 2018, the bank had extended credit to as many as 12,000 small enterprises and had a loan balance of 128 billion yuan.

In 2015, a client manager at Rural Commercial Bank learned that Shanghai Shiquan Grape Cooperative, located in the southwestern suburb of Jinshan, was suffering a cash squeeze because of plans to expand its growing area. It was refused a loan by several banks because of a lack of collateral.

With the help of a local rural committee, the bank extended a mortgage loan of 1 million yuan to the cooperative, with the right to operate the contracted land as a pledge of security. The loan was the first of its kind in the Shanghai banking industry.

Since then, the bank has issued more than 100 million yuan in loans, with land management rights as collateral. That has benefited more than 80 cooperatives and large farm households.

Liang Dongcai, a researcher at the Financial Research Center of the Bank of Communications, said lenders would be well-advised to use financial technologies like Big Data to reduce risk.

Xinyan AI Technology, a Shanghai-based fintech startup, has assisted domestic rural commercial banks in improving the efficiency of loan approvals and reducing bad loan ratios for their consumer credit business.

To be specific, by analyzing users’ authorized information like their phone records, monthly phone charges and credit card collection records, the firm has helped small lenders make comprehensive and intelligent evaluation of the borrower’s credit and identified potential risky consumers.

With the help of Xinyan, banks are able to analyze the daily operation data, traffic violation records and owner’s consumption data before granting loans to small carriers on the China’s Uber-type service for trucks Guiyang Huochebang Technology Co, also known as Truck Alliance.