Temat: A Lending Life Raft for China's Small Businesses - Alizila

A Lending Life Raft for China's Small Businesses

By Jim EricksonNov 25, 2010

Like most small-business owners in China, when Xie Huibo needed a loan, he depended on the kindness of kin. Since starting a machine tool company in his home city of Fenghua in Zhejiang Province six years ago, Xie says he has occasionally tapped family members for working capital. But over the summer, when the needs of his 20-employee company exceeded the RMB20,000-RMB40,000 ($3,000-$6,000) loans his relatives could provide, he turned to an unusual source: Alibaba.com's AliLoan program.

Through AliLoan, Xie in October borrowed RMB135,000 ($20,300) from China Construction Bank (CCB), which he used to buy equipment and to supplement cash flow. "It's very difficult for companies like mine to get loans in China from commercial banks," Xie said. "They ask for collateral, which most companies don't have. But Alibaba can provide (unsecured) loans. It's a very good channel for small companies."

Xie is among an increasing number of Chinese SMEs that have discovered that Alibaba.com is more than a B2B trading website. It's also a source of a critical component of small-business success: financing. Since Alibaba.com launched AliLoan in mid-2007 as a pilot project with China Construction Bank, more than 6,800 Alibaba.com members have taken out loans totaling more than RMB22 billion ($3.3 billion). In a conference call with analysts earlier this month, Alibaba.com CEO David Wei noted a big jump in borrowers using the innovative program, which initially offered loans to Alibaba.com members just in China's Zhejiang Province but has since been expanded to Fujian, Jiangsu and Guangdong provinces, as well as to five major cities: Beijing, Shanghai, Ningbo, Suzhou and Xiamen.

AliLoan was started during the global financial crisis as a way to help small and medium-sized enterprises (SMEs) using Alibaba.com qualify for loans made by conventional commercial lenders. Alibaba.com doesn't lend money. It acts as a conduit and credit reference linking borrowers with participating Chinese banks—CCB and the Industrial and Commercial Bank of China. Several types of loans are on offer, including an unusual "group loan" that allows three or more small businesses to band together and apply for an amount that is larger than each would be able to qualify for on their own. Alibaba.com's role is to use trading data it keeps on individual members to help establish a credit score for would-be borrowers, and to supply banks with other information, such as a company's sales performance, that can be used to decide whether an applicant is a good risk.

"I think Alibaba's advantage is that we have online data for these SMEs, which allows us to provide a lot of risk-control methods for the banks," said Michael Gao, director of the Alibaba financial department at Alibaba Group, Alibaba.com's parent company. "Because the average transaction amount is low, we could find ways to reduce (partner banks') costs."

In the past, China's banks have focused their lending on large, state-controlled companies. Private businesses have been woefully underbanked, forced to rely on family, informal community lending networks and even loan sharks for financing. But as China's banking sector has increased in sophistication and become more competitive, conventional lenders have been cautiously expanding their horizons to include SMEs. AliLoan offers them a low-cost way to tap into hundreds of thousands of Alibaba.com members as a source of new customers. Gao said AliLoan is in talks with more than 10 banks about joining the program, among them Bank of China and Agriculture Bank of China. Further geographic expansion is also in the works. Gao said AliLoan will debut next year in Shandong and Sichuan provinces, and the city of Chongqing.

Additional growth may depend upon the program's effectiveness in helping banks profit from potentially risky small-business loans. So far, the proportion of borrowers defaulting on AliLoans has been less than 1 percent, which is low by financial industry standards. The average non-performing loan ratio at all Chinese banks was 1.30 percent at the end of June, according to the China Banking Regulatory Commission.

To help manage risk, Alibaba Group, CCB and several provincial and city governments last year created five regional reserve funds. Alibaba Group invested a total of RMB90 million ($13.5 million) in these five pools, which total RMB270 million ($40.6 million) when contributions from local governments and CCB are included. The reserves are a backstop to help cover any loan losses that might be suffered by CCB. Gao said that Alibaba.com also intends to become more involved in assessing the creditworthiness of individual borrowers. Besides providing banks with data on borrower's online trading activities, AliLoan next year will begin actively investigating the financial standing of loan applicants, with members' permission.

Still unclear is how Alibaba.com plans to profit from the AliLoan program, something it has not done so far. The company supports the program by providing banks with space on the website to market AliLoan, but lenders pay no advertising fees. Nor does Alibaba Group or Alibaba.com take a cut of the interest earned by participating banks. That may be about to change. Without giving details, Wei said recently the AliLoan program was "on the edge of monetization." Gao acknowledged that earnings are a priority. "We are considering ways how to help SMEs get loans and find the profit model," he said.

Alibaba Group is already running a government-licensed, small-loan finance company in Zhejiang Province, which can extend credit directly to borrowers although it cannot collect deposits. Earlier this year, the finance company began offering micro-loans to merchants using Taobao, Alibaba Group's giant online retail website. The average size of these unsecured "credit loans" is just RMB36,000 ($5,400), but the program has attracted more than 10,000 borrowers so far. "We are lending to very small companies, some just several persons," Gao said. "They are entrepreneurs who don't have the daily income to get loans from banks.That means we are the only ones who can lend to them." He added: "It's a promising market."

Although Alibaba executives aren't disclosing details yet, other initiatives are in the works. Alibaba Group on Nov. 17 announced it had formed a strategic partnership with Shanghai Rural Commercial Bank to offer financing, credit and debit cards, online payments and other financial services to rural Chinese businesses and consumers.

http://www.alizila.com/details/index.php/news/2010-11/70/

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