Agricultural Bank Offers CFPA Microfinance RMB 200 Million Wholesale Loan

According to a Sohu Article, the Agricultural Bank of China (ABC) has offered CFPA Microfinance a 200 million yuan wholesale loan.

Based on my research of CFPA Microfinance, this will be CFPA Microfinance’s third wholesale loan agreement.  The first was with the China Development Bank back in December 2006 for 100 million yuan and the second was a revolving credit facility with Standard Chartered Bank in January 2008 for 20 million yuan.

Such wholesale loan agreement is a win-win for both parties.  CFPA Microfinance gets additional funds to expand its loan capital and ABC meets the three agricultural dimensions policy loan requirement (三农) mandated by the government.  Moreover, ABC doesn’t have to waste its time making microfinance loans on its own, which it has done poorly in the past.  Depending on how much leeway ABC with its auditors on how to classify the loan (whether it is considered to be implicitly government backed), it may only need to be put up minimum capital reserve requirements.

This agreement not only increases CFPA Microfinance’s loan capital, it solidifies the MFI’s lead in China’s microfinance sector.

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  1. Fiona says:

    If the loan is treated as government-backed loan, both sides would benefit (i.e. ABC reduce tie-up capital, and CFPA get higher credit limits and better covenants). However, this should not be the case from a risk management perspective.

    I believe implicit government support/guarantee is not recognised in most of the banks’ scorecards. For example, the facility with Standard Chartered Bank. This deal was rated with a finance & leasing scorecard developed internally in the bank, and the rating was determined based on the financial & qualitative factors of the microfinance unit of CFPA. No government support was recognised in the scorecard. People may think that is a little bit cruel, but internal control procedures should be complied anyways.

    In order to increase commercial fundings to CFPA and other NGO microfinance units, the government need to show more explicit guarantees and more support. This is a win-win-win situation.

  2. Yam Ki says:

    Thank you for your comment Fiona! You absolutely zoomed in right into the crucial issues for the banks.

    You clearly have a clear understanding of how SCB ranked the CFPA credit facility for its own credit management system. And you are exactly right that it should be classified as a loan without government support to be sure that internal control are conservative and tight.

    I am just curious about how ABC would rate their loan to CFPA. The organization is not an SOE, but it does receive some support from the government. I wonder how much influence the government exerted to help CFPA MF secure the loan from ABC, which in turn, may affect how ABC would rate the credit of the loan internally. I wonder if it’s coincidental that ABC signs this deal and the Liu Mingkang is talking about providing financial services to rural areas with no financial access.

    I agree that the government guarantee support is a good idea in terms of making a win-win-win situation. The questions I have are on implementation. What’s the best way to maximize benefits for the MFIs and its clients? Should the government set up a guarantee pool that a;; MFIs can apply for (similar to some of the work that the WB, IFC, and UNCDP have done)? Or should the government ‘pick winners’ and back a few MFIs? Or should the guarantees be for the borrowers instead of the MFIs, which can help some of the state owned commercial banks to downscale? If the government guarantees the loans, then would commercial banks who lend to either the MFI or the client be able to put up the minimum required reserve capital for it?

  3. Jonathon says:

    Hi Yam Ki

    I am not sure if you are still interested in this topic, but if so, I read a great article about microfinance in China today which attempts to summarise the issues.

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