Análisis de la demanda

1.3.4.1 Unsuitable product design

As discussed above, financially excluded people with respect to mainstream credit usually suffer from low- income or unconvincing credit records. Generally, the

128

the People’s Bank of China Center Reference Center, ‘About Us’

<http://www.pbccrc.org.cn/zxzx/ zxg k/gywm.shtml> acces sed 30 March 2015.

129

Ibid.

130

Ibid.

credit risk is related to the amount of the loan, that is, the higher the loan amount, the riskier the loss a bank would suffer. Therefore, if a small-amount loan is available from mainstream lenders, the corresponding requirement of credit record and income level could also be reduced.

However, such products are usually unavailable, or at least not targeted to the financially excluded group of people. This is because the fixed costs of lending would not reduce along with a decrease in the loan amount; on the contrary, dispersed small-amounts would raise the costs of banks, as the expected income from such small loans cannot cover the costs. As the DWP Credit Union Expansion Project Report puts it, ‘lending small sums to low- income (subprime) consumers is expensive, and carries a higher risk of default and eventual write off’.132

It is understandable then that suitable small-amount loans are usually unavailable from banks.

To ensure profit, commercial banks nowadays usually target the more well-off classes. From the criteria used to determine consumer credit listed, it is easy to find out which groups of people are targeted customers in the mind of commercial banks. For example, unsecured personal loans for consumption provided by one of China’s largest commercial banks, the BoC, are called ‘gong xin dai’,133 which means ‘a loan for the salary-earning class’, in Chinese. The length of loan repayments is usually set as one year and shall not exceed three years. Borrowers are allowed to use the loan in all legal transactions, including ho me decoration, car purchase, education and medical treatment. The size of the loan is set as two to three times that of the proposed borrower’s annual income. No collateral or pledge is needed for this product. This product is a typical unsecured personal loan available in the Chinese market. Targeted customers of this loan product are quite straightforward: ‘This revolving credit loan is provided for staff of enterprises and public institutions who have steady and continued income, including but not limited to civil servants, staff of state-owned enterprise, teachers, doctors, and police and army officers.’

132

Purtill, Cray and Mitchell (n 99) para 3.2.

133

Bank of China, ‘Gongxindai’

Other large banks have similar eligible standards for proposed borrowers of their personal loan products. The eligibility criteria for credit card and overdraft facilities have similar standards for targeted customers. The UK’s mainstream credit providers require similar conditions.134

From the bank’s point of view, a steady and decent job means higher and secured income, while unemployment, part-time jobs or being a farmer, among other things, cannot support people’s repayment ability, since their income is neither high nor steady in order for them to be able to guarantee repayments. Based on occupation and income level, this would constrain low- income residents’ access to credit from commercial banks. Less- valuable customers would naturally be kept out of the mainstream credit sector, while banks design their products ‘tailored’ for high-value customers.

Furthermore, the amount of available credit tends to be high, which may exceed low- income people’s spending ability, as in the example cited above. For people with a low income, what they could obtain based on their economic level and repayment ability would be small- amount credit, which is better since it does not require collateral. As Kempson and Whyley suggest, ‘the types of short-term credit facilities needed are ones that offer small, one-off, fixed-term loans rather than revolving credit, fixed and automatic payments, and take advantage of developments in technology to allow much lower annual percentage rates (hereinafter ‘APRs’) than are currently available from moneylenders’.135

However, the cost of handling a small loan is not lower than a large one and yields a small profit. Tailored products are therefore specially developed for high- value customers, while the lower end of the market receives less attention. Inappropriate products also exclude low- income borrowers from applying for loans and leads to self-exclusion, as this would result in people turning away from commercial banks, since they believe that they would be rejected. In general, the problem is, as Timothy Edmonds suggests, the ‘mismatch between potential customers’ needs and the products on offer’, while product diversity is ‘clearly part of the answer, for all underserved markets’.136

134

Purtill, Cray and Mitchell (n 99) para 3.2, ‘The banks do not . . . tend to serve this sector of the market, seeing reputational risk from the high interest rates required to make adequate returns on capital.’

135

Kempson and Whyley (n 6) 45.

1.3.4.2 Deregulation of the banking industry

On a macroeconomic level, the change in the regulatory environment could explain many issues: why banks close their branches or why they are targeted at wealth management businesses. This is, however, closely related to the change in the complex macroeconomic environment and cannot be fully d iscussed here. This section of the thesis only sketches the conditions based on previous research.

In the UK, it is recognized that the deregulation in the banking sector since the 1980s has led to higher competition, which forces banks to focus on high net- worth businesses.137 Prior to the 1970s, the UK had adopted an ‘interventionist approach’ in regulating the banking industry by using banks as ‘a direct instrument of government macroeconomic policy’.138

After the change in the regulatory environment, that is, the introduction of new legislation, including the Financial Services Act, in the UK in 1986, the competition in banking industry increased as a result of the new self- regulation regime, which also covers commercial banks’ investment business. Financial institutions are therefore encouraged to compete across market sectors.139 To win competition, the banking market becomes more concentrated and banks have to become more profit- oriented, which inevitably leads to the closure of bank branches to reduce cost.140 To make higher profits, the main activity of commercial banks also changed, ‘from the provision of credit-related services to investment-oriented products and fee-generation activities’.141 Therefore, targeted customers inevitably turn out to be high net-worth people with higher incomes, while non-profitable basic services are cut, reduced or charged fees.142

The banking industry in China has also experienced tremendous reform in its equity structure since the 1990s.143 There are two dimensions that are relevant to

137 _{Kempson and Whyley (n 6) 1.} 138

Joseph Nellis and Terry Lockhart, ‘The I mpact of De regulation on the UK Building Society Branch Network in the 1990s’ (1995) 13 International Journal of Bank Marketing 5. Table 1 provides a list of deregulation methods in the UK from 1979 to 1991.

139

JN Marshall and others, ‘Regulatory Change, Corporate Restructuring and the Spatial Development of the British Financial Sector’ (1992) 26 Regional Studies 453.

140 Yeung (n 73). 141 Ibid. 142 Ibid. 143

For detailed d iscussions of Chinese banking regulatory reform and an introduction to the Chinese banking industry, see, for e xa mp le, Michael F Mart in, ‘Ch ina’s Ban king System: Issues for Congress’ (2012); Xiaochi Lin and Yi Zhang, ‘Bank Ownership Reform and Bank

this issue. First, after the reform, commercial banks have now become a separate legal person responsible for their own profit and loss related to their property, and for taking responsibility for their stockholders.144 The result of the financial system reform is noteworthy. They are operating in a Western style and using similar international regulatory standards, just like commercial banks operate in Anglo-Saxon countries which actually provided the model for the Chinese banking industry setting up its own business standards.145 This, however, excludes less-affluent customers outside their ‘normal’ loan services due to their higher repayment risk and less profitability.146

Second, in 1998 the State Council decided on reforming state-owned banks’ branch structure.147 This reform proposal was soon echoed by the PBoC and gives state-owned banks detailed requirements.148 The number of bank branches in the same region is limited to one, while othe r branches shall be closed and their licence turned in.149 Since then, commercial banks have gradually shifted their business to large and medium cities, and closed around 30,000 branches at county level or below.150 The trend of branch closure in China was initially aimed at cutting costs and improving state-owned banks’ performance, and transforming them into more competitive and profitable ‘modern’ banks. However, the closure of bank branches would inevitability limit rural residents’ access to bank services, which is often suggested in the research.

Yeung gives reasons for bank closure in China from another side of the reform, which underlines the stimulating influence of the entrance of foreign banks on Chinese-funded banks.151 Compared with Chinese- funded banks, foreign banks Performance in China’ (2009) 33 Journal of Banking & Finance 20; A llen N Berger, Iftekhar Hasan and Mingming Zhou, ‘Institutional Development, Ownership Structure, and Busine ss Strategies: A New Era in the Ch inese Banking’ in James R Barth, John A Tato m and Glenn Yago (eds), China’s emerging financial markets: Challenges and opportunities (1st edn, Springer 2009).

144

Lin and Zhang (ibid).

145

Yeung (n 73).

146

Ibid.

147

State Council of China, 国有独资商业银行分支机构改革方案 [Reform Scheme of State- Owned Commercial Bank Branches] (1998).

148

PBoC, 中国人民银行关于落实国有独资商业银行分支机构改革方案有关问题的通知

[Notice of People’s Bank of China on the Implementation of Issues about the Reform Scheme of State-Owned Commercial Bank Branches] (1998).

149

Ibid.

150

Sparreboom and Duflos (n 64) para 2.1.3.

151

Yeung (n 73) 184. It is mentioned that in 2006, before the init ia l public offerings of the Industrial and Co mmerc ial Ban k of China (here inafter ‘ICBC’), the largest comme rcia l bank in China, the staff complement was cut by more than 200,000 staff members.

have more mature experience in how to provide high-standard services to the most profitable part of the market but less so to branches, with the result that from the beginning of their market entrance, foreign banks have avoided compet ing with domestic mega-banks in less-profitable areas. Instead, they are ‘strategically’ providing personalised higher-end services to rich customers, who want more sophisticated services tailored to their needs.152 With higher-quality services, foreign banks find it is easier to attract high-value customers. Yeung finds that the pressure of competition from sophisticated foreign banks in the high-end market stimulates Chinese- funded banks to refine their performances, ‘through reducing the high fixed and operational costs embedded in the branch networks by closing branches and making staff redundant’.153

In fact, 16% of the rural unbanked in China attribute the major difficulty of their getting credit to the lack of local financial institutions.154 The decrease in the number of commercial bank branches also limits access to credit of people who live in remote rural areas, which largely overlaps with the ‘low-income’ group in the Chinese context. Fewer available branches in service would also affect rural residents’ access to basic banking services.

In general, although the Chinese banking market is dominated by mega-banks and followed by joint-stock commercial banks, their efforts are overwhelmingly concentrated in the ‘lucrative urban market’.155

The unprofitability of the lower end of the market, as well as the pressure of cost reduction and competition in the new era, also drives commercial banks to leave the low-profit market. To some extent, this process has been the natural by-product of the reform and deregulation since the 1990s. Reform in the commercial banking sector in China has rapidly increased the availability of consumer credit since then. However, the lower end of the market is largely overlooked by commercial banks. This is similar to the case in the UK after its deregulation in the 1980s, as the increase in competition would inevitably lead to profit-oriented business tactics.

152 Ibid. 153 Ibid. 154

Zhang and others (n 72). Rural Finance in Poverty-Stricken Areas in the People’s Republic of China: Balancing Government and Market’ (2010).