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2010-12-01 | All chapters

China allows first foreign loan provider
Financial Times, 23th November 2010

Home Credit Group, a Czech company operating mainly in Russia and eastern Europe, has beaten some of the world’s largest financial groups to become the first foreign company to set up as a consumer finance lender in China.

The company received a licence from China’s banking regulator this year and will formally launch a pilot operation in the eastern city of Tianjin today providing small loans to consumers to buy products such as mobile phones or motorbikes on credit.

Although Home Credit has operated in China since February 2008 and has built up a nationwide network of retail stores offering credit products, it was restricted by regulations such as a requirement to partner with local institutions.

Consumer finance is really one of the last financial industries in China to develop – there’s virtually nothing there,” Alexander Labak, chairman and chief executive of Home Credit, told the Financial Times in an interview in Beijing.

“If you go into a store and ask to buy something with a loan, you can’t, and if you go to a bank and ask to borrow money to buy a PC they will say with a smile: ‘sorry, the ticket is too small’.” As well as giving a licence to Home Credit to set up a wholly-owned subsidiary in Tianjin, China’s banking regulator has granted domestic groups licences to set up pilot consumer finance operations in Shanghai, Beijing and Chengdu.

Those companies are backed by the Bank of China’s Shanghai branch, Bank of Beijing and Bank of Chengdu respectively.

The average size of the 700,000 loans extended by Home Credit in China this year is just Rmb1,800 ($270) and it is targeting the 700m or so Chinese consumers with salaries below $500 a month. Most of these people lack a credit history and many have never opened a bank account.

Home Credit is the largest consumer finance group in Russia and has large operations in eastern Europe, where Mr Labak says 50 per cent of consumer electronics sales are financed with the kind of non-collateralised, on-the-spot loans his group provides.

The company has ambitious plans in China, where it expects to break even by next year and be issuing more than 10m loans annually within two or three years.

Mr Labak said Home Credit’s focus on emerging markets and its roots in the former Czechoslovakia made it less threatening than large financial companies to China. Other companies that want to enter the Chinese consumer finance market include General Electric, HSBC, BNP Paribas, Citigroup and AIG.

“What we’re doing really has the potential to stimulate domestic consumption in China, which is a key target of the government,” Mr Labak said. “And I think China needs local guys who can copy someone who is as pioneering as we are.”

Analysts say a traditional aversion to credit means older Chinese consumers in particular will be slow to take up offers from consumer finance companies, especially given the high fees and interest rates they charge.

“But over the long term there is huge potential despite the current focus of major Chinese banks on corporate lending and mortgages,” said Wang Mingfei, an analyst at Orient Securities.