Micro Credit Providing a Lifeline

Potential risks

However, Liu Fan, a professor of business and finance with the China Youth University for Political Sciences in Beijing, expressed concern that the rapid expansion of loans might increase the risk to the lenders.

As most of the money available comes from poverty relief organizations, the capital is limited and unsustainable, which may lead to increased cooperation with financial institutions.

"It requires more strict supervision and risk-control management to avoid bad loans. It is just what the non-governmental organization lacks right now," according to Liu.

It is also a challenge facing micro-credit companies with a business relationship with the association.

CreditEase Business Consulting Co Ltd, a Beijing-based financial services company, was the first in China to provide an online peer-to-peer (P2P) lending platform. It evaluates the creditworthiness of applicants through a comprehensive risk-control system that focuses on a person's ability to repay.

Lenders can search for information on borrowers on the Internet and assess their creditworthiness. CreditEase charges the borrower 1 percent of their total loan for providing its services.

Tang Ning, the company's CEO, said that the micro-credit sector is in its infancy in China, and the most important thing is to provide an inclusive credit service. "Our aim is to offer a platform for clients to have face-to-face communication and provide customized credit services, supported by cutting-edge technology," Tang said.

In 2009, Tang launched the P2P lending platform and began cooperating with the Xixiang WDA. Currently, about 1 million yuan of the association's funds come through the online platform.

However, there are still no regulations governing P2P loans in China, nor have the micro-credit service institutions have been placed under the supervision of the authorities.

On Aug 23, the China Banking Regulatory Commission warned that without strong external independent supervision, P2P companies may chase profit by accepting deposits and then lending them out, a practice classified as illegal fundraising.

"Micro-finance has played an important part in developing personal credit ratings. But a better way to avoid the potential risks is to strengthen the credit education and information system," said Zhao Fengwu, director of the China Market Credit Management Association.

The government is expected to improve the nationwide credit information system and support the ratings agencies, which will help improve the micro-credit services, said Zhao.

"The construction of China's rural credit system is developing rapidly," Zhao said, pointing out that more than 70 million farmers obtained loans totaling 2.95 billion yuan from micro-credit organizations in 2010.