Microcredit in China

Attended a panel on microcredit in China this evening. One interesting take-away was that although the default rates on microloans are widely known to be very low, it is often because borrowers rely on family members or others--as opposed to surpluses from successfull investments--to help them make repayments. Many models (including, I believe, the Grameen model, though don't believe Grameen itself operates directly in China) require borrowers to enter into small "borrower groups" that are jointly liable for repayment. Interestingly, borrowers are often not permitted to join borrower groups with their family members, though aside from that restriction they can choose their group freely. These groups help exert social pressure on each individual borrower to repay, though they also serve as what was called "social collateral" (i.e., if one member can't pay, the others will). Of course, if the only capital the group had access to were the microloans, then one could argue that on net the impact must be positive if default rates are low, even if not every investment is successful. But even among the very poor, there are often other sources of capital (such as family, possessions, or land), and I got the sense that these sources often filled in the gaps when it came time to make repayments.

I also found the discussion of costs to be interesting. One panelist noted that scale was a key consideration for those institutions attempting to make microlending competitive. She observed that this had a tendency to refocus microfinance institutions on urban areas (or other areas of high concentration) where more loans could be serviced in a short period, even if the deepest poverty in a given country like China actually existed in the remote countryside. Another panelist (the one most closely tied to a particular microfinance institution in China) mentioned the need to provide business training (a.k.a. "technical assistance") in addition to access to capital. Left me wondering again about the sustainability of a business-oriented model that would inherently involve high costs such as technical assistance and heavy loan servicing (given the high number of small loans and the necessity of unsophisticated servicing techniques). Some of the costs can be minimized, of course, but that may be difficult to do without blurring the mission.

There was also a broad discussion of the types and effectiveness of various microlending institutions in China, as well as regulatory changes that could make the microlending environment there more favorable, but I would need to go back to the slides to really remember all the points on those issues. I think they may get posted online somewhere, so if I find them I will try to post a link.

Incidentally, one of the panelists was the founder of a microcredit intermediary focusing on China called Wokai. I set up a meeting to talk to her more about her experiences, so I'll report back what I learn.