Lessons from children, old ladies

September 1, 2009

China’s banking system could take a cue from children and
neighborhood social groups to strengthen lending rules and
ensure that credit flows to where it is needed most.

The country’s banks lent a whopping record 7.37 trillion yuan
($1.08 trillion) in the first half of the year, but regulators
worry that a significant portion is not flowing into the real
economy and smaller firms where funds are needed the most.

“If you give children money without strings attached, they
won’t value it,” Yang Zaiping, the executive vice president of
the China Banking Association, said at the Reuters China Investment

Yang was making a point about firming up banks’ credit policy
to ensure that borrowers understand the importance of maintaining
their credit-worthiness.

The executive said a traditional Chinese network of neighbors
and old ladies that watched after neighborhood safety and other
local issues could be copied to help channel funds into small and
medium-sized companies, a long-standing problem in China.

“Old ladies know a lot about the neighborhood,” he said.

Yang said banks could lend to a group of small companies, and
as long as all repaid their loans, then interest rates would
remain low. But if only one borrower were to default, all would be
punished, putting more responsibility on all borrowers to ensure
each loan remains active.

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