China's credit insurance growth hampered by high fees
Source: Asia Insurance Review | Apr 2015
Around 142,000 micro enterprises received loans totalling CNY99.71 billion last year, with the support of insurance companies which had offered credit insurance. However, the market potential has yet to be fully tapped because borrowers are deterred by the high insurance fees.
A survey by the China Democratic National Construction Association showed that credit insurance in the country is costly, reported Securities Times. The study found that 10% of micro enterprises are able to borrow money from banks, at interest rates of up to 30%. The remaining micro enterprises have to obtain loans from moneylending companies or through informal channels. The cost of borrowing for them is around 25%, or higher for emergency loans.
In 2014, CIRC and other relevant agencies such as the Commerce Ministry, the People’s Bank of China and the China Banking Regulatory Commission, developed guidelines to strengthen and promote credit insurance in order to serve the micro-enterprise sector. Before this, several non-life insurers had entered the market by tying up with the local government and banks.
For example, in the southern city of Guangzhou, the bank bears 20% of the bad debt when a loan turns bad. The insurer covers the rest of the bad debt up to the total amount of annual premiums received in a pool. Where the delinquent debt exceeds the premiums, the uncovered sum is borne by a credit risk insurance fund. The loss of interest on the bad loan is borne by the bank.
Risk of bad debts among micro enterprises tend to be higher
The risk of bad debts among micro enterprises is higher than that for other businesses. Statistics indicate that the non-performing loan rate for micro enterprises is twice that of other businesses. For loans of less than CNY5 million, the delinquency rate is five times higher than for other businesses.
There is growing demand for credit insurance in China. Earlier this month, China’s banking regulator directed banks to increase lending to small businesses that are struggling in the current slowdown in the Chinese economy. However, banks are less likely to lend and insurance companies less willing to provide cover to high-risk borrowers in an economic downturn.