During my stay in Chifeng, China over the last two weeks, I have closely observed the work of ACCION Microcredit Company’s (AMC) loan officers and I have also experienced the daily operation of AMC. I am very impressed by the loan officers and the fresh energy AMC injected into Chifeng’s finance industry. Being the first 100% foreign-owned Microcredit Company in China, ACCION has had to overcome many difficulties.
AMC provides micro and small businesses with non-collateralized loans basing their underwriting on ACCION’s proven methodology of cash flow lending. Loan uses are mainly for businesses, such as working capital and purchases of income generating assets. AMC remains focused on the micro market with loan sizes starting at one thousand Yuan (RMB1,000) for a maximum term of 12 months with both principles and interests being paid back in installment monthly.
AMC’s main advantages in the urban market include flexibility of loan guaranty and customized services. Guarantors do not have to be regular salary earners, as long as they have ability to pay back the loans. Loan officers talk closely to applicants about their family and their business, and they also visit their home and businesses to collect first hand information. They also use every channel, such as friends and business partners, to learn more about the clients. Through these, clients’ month income & expenses, cash flows, personal creditworthiness, and other information can be evaluated and cross-checked.
CHIFENG CHINA – 8 a.m., I walk into our AMC Hongshan Branch, saying “good morning” to all staff and loan officers. They have already started to prepare for the day’s work; some of them chatting with each other; one or two having Dui Jia and soy milk as breakfast; one guy sketching on the markerboard, where the loan officers keep goals to be accomplished, a poem that motivates their work, and some doodles. Among them, there is one girl, a girl you wouldn’t differentiate from the other loan officers from appearance, but you would notice that she has been moving from desk to filing cabinet, to making phone calls, back to the desk… yet keeping everything on an organized pace. She is Xiaoqi Yan, the superstar I am going to introduce, a girl who is in love with her work and success as a loan officer.
Xiaoqi, 28, is the only senior ranked loan officer among all nineteen loan officers at AMC. She has been working at AMC for one year and four months, yet her outstanding performance has brought her over one hundred clients (1/7 of all AMC clients) and almost close to zero delinquency rate. The senior rank has enabled her to being a leader among all nine loan officers at the Hongshan Branch. To motivate the loan officers, the branch started a competition between the female and male loan officers. This morning, August 3rd, just at the beginning of the month, Xiaoqi’s female group is already happy to announce 14 potential deals against the male group’s 7.
CHIFENG CHINA- Today, July 27th 2011, is the first birthday of the Hongshan branch of ACCION Microfinance China (AMC). At the end of the busy day, all staffs at the branch got together to cut cake for their first year of success. When we invited branch Manager Song to tell us about their first year, she smiled with joy.
On July 19th, I visited Mr. Sun, the shop owner of a Children’s Wear Shop in Bayan No.4 General Merchandise Market. He is currently our urban individual loan client and his business is in good condition. The interview is based on the questionnaire designed by Karen Lewin, ACCION’s consultant for saving and marketing for Bayan VTB.
He really appreciates Bayan Rongxing VTB’s support in his business. “Without the capital from its loan, I could not grow my business so smoothly. It is extremely difficult to borrow money from other big four state-owned banks and it is also more expensive to borrow from informal channels.”
Now he has four shops within the market building all selling children’s wear, with eight employees. The shop in which we conducted interview is about 100 square meters. He proudly introduces his scale of business to me, “if all his clothes in inventory are listed in a row, it can stretch to 2 kilometer”. Moreover, apart from the apartment he is living now in Bayan, he has an apartment in Dalian City, which is the south of Liaoning Province.
I also asked about banks and services he uses and his experience about them. Apart from his gratitude for Rongxing VTB’s financing help, he also speaks highly of VTB’s excellent service attitudes. He would borrow more from VTB is possible since he is eager to expand his investment in real estate.
BAYAN, CHINA- After a sumptuous lunch at our loan officer’s family-owned restaurant, we took a three minutes walk to Mrs. Sun’s home. Mrs. Sun was one of the five happy female clients we interviewed in the morning, who was so enthusiastic to introduce to us how the loans she received from Rongxin Village and Township Bank (VTB) had enabled her to build eight stores outside her home and gradually helped her family to get better.
At the turn of a major corner, a row of stores with colorful name boards and clear white paint were eye-catchy on this dusty country road. A fruit and vegetable “supermarket”, a Sichuan hotpot store, an Anhui noodle shop, a makeup and beauty shop, and even a veterinary clinic. “These are the stores that Mrs. Sun leased out” as our loan officer introduced to us, “it is at great location, all the traffic entering the town need to pass here.” Read More…
BAYAN CHINA- let me begin this post by a set of questions and answers that might blow your mind, so please be cautious and ready before you read on…
“So what bank do you use the most?” Asked our interviewer Xue Wang.
“Postal Saving Bank (PSB).” Answered Mr. Fu, one of the five farmers in this focused group interview.
“What do you think of PSB’s service?” Asked Xue Wang.
“Their service is poor and their customer service is very bad. The cashers chat with each other just ignoring customers at the counter. There is always a crowed of people in the bank. Sometimes, I waited for a long time but when it came to their close time, they just close all the counters…” Mr. Fu continued to pour out the bitterness he has received from PSB, as the others began to raise voice to add their own complains.
“If you want to get faster service at PSB, you have to buy a bag of fertilizer from them, or you buy a lottery ticket from them, which never gives anything…” complained Mr. Liu, “it is unfair for people who don’t want to spend money to jump the queue.”
“So why do you still use PSB the most?” Asked our Xue Wang and I’m sure it is also your curious question by now.
“Because we can only get the grain direct subsidy from PSB.” Explained Mr. Liu, “The big boss of PSB was lucky to win service for this policy from the government, before that, no one goes to PSB.”
What is the best way to discover clients’ needs? Talking to them in groups directly is a very effective way. This week we did three focused group discussion in three villages in Bayan, Harbin. The farmers are Bayan Rongxing VTB’s loan clients. With five to six clients in one group, we talked about their choices of banks and financial services, and ranked their preferences for saving product attributes.
I find several important needs of clients. Firstly, recognition is important. Many farmers don’t know Bayan Rongxing VTB’s background and some think it is privately owned bank which is “insecure”. In their opinion, long existed banks including the four state owned banks and Postal Saving Banks are backed up by the state, so they are secure. But the VTB is newly established for three years.
Secondly, returns on saving is the most important inventive for them to save. Many clients told us directly that higher interest rates are the best promotion of the VTB. In Chinese, what the farmers need should be “Shihui”, which means practically useful.
Accessibility is also among the most important criteria. Postal Saving Bank and Rural Credit Cooperatvies have many local branches in different villages and PSB also have many branches in Cities, so they hold the majority of farmers’ saving accounts. There’s 0nly 2 branches in Bayan so far and it is very costly to open new branches. ATMs may be installed in the future, and mobile banking has a long way to go. So this is among the biggest challenges of VTBs.
What makes excellent consultancy? — Open mind, big picture, and quick adaptation to local environment
How an international organization, like ACCION, can provide effective consultancy to a very localized institution, like Bayan Rongxing VTB in China? ACCION origins from Latin America and is deeply rooted in America where the culture is totally different from Chinese culture and where the legal and economic environment is also totally different. After working with my ACCION colleagues for a month, I got lots of ideas about this. I am impressed by my colleagues and I share a lot of feelings and concerns with them.
As Karen, a consultant from Australia who is helping to improve saving and marketing here, told me that consulting is about alternative thinking. As a consultant, you should firstly have a big picture in your mind and know which direction you want to go, and then ask, listen, and think in that direction. Otherwise, you will be lost in tons of information, especially when you know little about the local markets, local culture, and local “everything”. You have to depend on others for information, so without a big picture you will be easily led by others and can’t get the key information in a short period time. Since different people have different perspectives and probably biased opinions, it is critical to listen to different people and gather information from varies sources.
Bayan, China- My first impression of Bayan, Harbin, China started off with the surprise of … how expensive watermelons are on a normal street vendor! (A watermelon cost me 26 yuan, about 4 USD, similar price as a watermelon sold in a Kroger in the United States…) Well, before I arrived in Bayan on June 27th, initial google mapping gave me the impression that Bayan was supposed to be an isolated town in the middle of nowhere (if nowhere means miles of farmland.) I expected it to be a poor little town where people live in poverty and poverty should be close to having problem with clean water and electricity. Apparently, I was a greeted by a big “SURPRISE”, which complete blew my mind. As my partner Weiwei introduced in her previous post, the town center of Bayan is developed with all kinds of shops along the streets and traffic are somehow busy on the road.
Yet, the whole Bayan County has a 700 thousand population, where about 200 thousand live in the town city, still about 500 thousand live in the widespread 10 villages and 8 towns of Bayan, where most of the population are farmers, our target microfinance customers.
For my first week of work at Bayan Rongxin Villege and Township Bank (VTB), our MFI partner in Bayan, I had the pleasure to work with Karen Lewin, on her first visit to carry out an on-going project to increase saving for the VTB. As Weiwei has discussed in her recent post, the VTB currently has no problem with demand for loans, but is struggling to attract more saving. I would like to point out three major block stones the VTB currently faces on increasing saving, but more importantly, I would like invite you, our loyal readers, to comment and contribute your idea about how to increasing saving for the VTB.
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!