China Experimenting with Insurance Programs for Small Loans

Per this report through Mr. Bai's blog, a Chinese insurance company now has an insurance program for small loan lenders. A borrower with monthly income over 2000 RMB now may purchase a policy from Ping-An Insurance Ltd. that covers up to seven (7) times of the loan amount. The policy will kick in if the borrower cannot make the payment due to personal injury or other accidents.

Ping-An sells the policy through regional bank it partners with. The partner banks can now issue loans WITHOUT collateral if borrowers buys the insurance policy. The low qualification requirement is certainly a plus but the policy comes with a stiff fee: 14-35% of the loan amount (if I read the original article right) that has to be deducted in full from the loan upfront.

Some thoughts from reading this story:
1. This is a three-way-winning development. First, it offers a way for borrowers without collateral a means to get loans. Secondly, it reduces the default risk (especially that from accidents or illness) for banks. Lastly, it gives the insurance agency a piece of lending profit.
2. However, to a borrower, it means one has to pay higher rates for loans without collateral. The higher rate may render some business opportunities unattainable.
3. The silver-lining for the needy may be in the competition among financial institutions. According to the report, Ping-An is both a bank and an insurance company in its originating province, Guangdong. Being a private company, it is barred from having branch offices outside of that province. Therefore, although Ping-An is able to offer direct loans at a higher rate for collateral-less customers in Guangdong, it has to separate the insurance business from the lending business in other parts of China, and has to partner with other banks.

Apparently, Ping-An believes the market has good profit prospect because it hired away an industry veteran away from Citi Bank Korea and set a goal of selling more than 260 million RMB worth of service in 2009.