Great process, great challenges
Bayan Rongxing VTB in Harbin, China has experienced fast growth since its establishment three years ago. Its active client number has reached nearly 10,000. It also electronically creates and maintains every client’s credit history and profile for checking and tracking. There are always both challenges and opportunities for VTB and let’s have a look at them. ACCION, as its consultant, has a lot to explore and help.
The major loan products include agricultural loans for farming and city loans for business and consumption. Agricultural loans are made through group guaranty lending and is not supposed to be large. In contrast, the vast majority of city loan clients take business loans which require housing property right certificates as collateral and the loan size can be 50% of the assessed value of the property, and the other city loan clients take consumption loans which require a guarantor or regular salary confirmation. New loan products are to be developed to meet more needs.
ACCION may help Rongxing VTB to develop a new product, namely city group lending which requires three to ten people to form a group as guaranty instead of collateral or salary confirmation. If this product is created, small business owners in the Bayan town who do not have collateral or regular salary can have access to bank loans. Lending to these clients cannot rely on business certificates or financial statements since it is easy to make fake certificates and that they probably cannot offer standard financial statements. Therefore, how to judge applicants and clients on their credibility and capacity is the core problem of this type of loan. Cross checking from different sources, knowledge about local market and social network can all be very crucial elements influencing lending decisions.
How to develop risk management system to adapt to this kind of loan product? One key can be carrots and sticks on loan officers. Performance related pay may be a very important technique to ensure loan officers to be rewarded for quality work, and to be punished for defaulting loans or improper manners. However, there are a number of problems implementing it. Firstly, is it useful at all? Loan officers may have opportunities to receive under-table payments from clients to get loans. If so, punishment effect may be offset by the under-table payments effect, i.e. loan officers who receive the informal pay may ignore punishment as long as “rewards” are larger. In this case, Bank’s performance related pay can be ineffective. So far, client survey shows very positive picture about loan officers’ business ethics and standard procedures. Nevertheless, if “hard” means like supervision measures and “soft” means enterprise culture are not developed and implemented at the same time, it may be difficult to avoid under-table agreements. Another measure may be to provide high enough salaries for loan officers to keep their ethics. To what extend is this problem in Bayan?
Another implementation problem of performance related pay can be equality among loan officers. Since different loan officers in charge of agricultural lending are responsible for different towns and villages, but there is great variation among different towns and villages in terms of population and income. Moreover, it takes years for loan officers to get familiar with the villagers and so it is costly to re-assign loan officers among different villages. These create difficulties to set benchmarks for loan officers, if the criterion is number and size of loans. If we use quality of loans instead as the criterion, then there may be a lack of incentives to find more new clients. What are the best benchmarks and criteria for Rongxing VTB’s loan officers?
A second challenge is the restrictions on expansion. Village Banks are supposed to serve the local region and are not allowed to lend beyond certain area. Rongxing VTB is only allowed to do business within Bayan County which makes scaling up difficult. Moreover, Rongxing VTB is not allowed to join Bank Clearing System. One reason is the huge investment required. Therefore, it cannot provide bank cards to clients which can make transactions and application for loans a lot easier. This exerts huge barrier on the expansion of the Bank’s business. This also adds to its small market share of saving, a critical problem of the Bank. There are other two reasons for the difficulty in absorbing savings. One is that the scale and credibility of Bayan Rongxing VTB is much smaller than big state-owned banks like Bank of China, Agricultural Bank of China, China’s construction Bank, and Industrial and Commercial Bank of China. Secondly, lack of branches also makes it very inconvenient for people to save in Rongxing VTB. Is it possible to establish mobile banking through partnering with mobile company branches which exists almost everywhere in the city? Is it possible to promote saving products by providing other incentives (deposit rates are fixed by central bank)?
Another big challenge is financing. As discussed above, there is huge difficulty attracting saving, so the cost of capital is high for Bayan Rongxing VTB. Currently, it mainly relies on its major shareholder Harbin Bank for financing. Is it possible to create a pool of capital for the VTBs under Harbin Bank for short-term borrowing and lending among themselves? Is it possible to find more sources other than Harbin Bank for wholesale lending? Is it possible to apply for inter-bank lending? Or is it possible in the future for regulations to change to make these happen? There are a lot to see and act in the near future!