In choosing between issuing a 1-billion loan to one massive state-owned enterprise or lending 1 million to a thousand smaller companies, most would prefer the first option as it seems more convenient and reliable. However, Zhejiang Tailong Commercial Bank (TaiLong Bank) takes the less-traveled path – the bank provides financial services to small-and-micro-enterprises (SMEs). Since its inception, the bank has cumulatively provided over ¥150 billion (around $23 billion) in loans, with an average loan size of ¥500,000, to its clientele, over 90% of whom are peasants-turned-entrepreneurs.
The bank originates in Taizhou, Zhejiang, an area that cradles family-owned workhouses which often develop into medium or even large-size production companies. The general people in Zhejiang province are known for their acumen and flexibility, hence often being termed as the “Oriental Jews.” The collective wisdom of the local people, as well as the natural nourishment of its business culture, give birth to the so-called ‘Taizhou’ model – the core strategy that empowers TaiLong Bank to operate smaller-sized loan businesses.
There are three main challenges of SME financing:
Informational Asymmetry: For small businesses, their accounting is often messy, thus standardized financial records that bear strong supportive power are often absent.
Speed: For example, a family-owned steamed bread house might receive an instant gigantic order and need to loan more money to purchase the corresponding ingredients that would otherwise be budget-infeasible for them. Small business’s financing calls are often swift, smaller, and more urgent.
Lack of Collateral: SMEs often don’t have adequate collateral that meets the standards set by common state-owned banks.
These challenges summarize why it is hard for both the businesses and the banks to borrow/lend money to one another. Rooting its ideology in the natural motivation of credit, TaiLong Bank took a customer-centralized community approach to overcome informational asymmetry and navigate risk. This approach involves:
- Investigating three “meterings” and three “qualities”: The three meterings refer to water/electricity metering and export taxation reports. The qualities involve the persona, product, and assets. These seemingly extraneous pieces of information significantly reduce the credibility uncertainty of the clients.
- Cross-verification methods (aka having two risk managers evaluate at the same time) and multi-faceted information sources (aka gossip and comments from neighbors).
- Targeted loan decision-making: Based on previously acquired information, if the client is not “red-flagged” (i.e., does not have serious signals that disadvantage loan failure, such as severe alcoholism), loan permission is granted. The financing upper bound and interest rates are then decided case-dependently. Finally, the loan structure and guarantees are also determined based on preceding scrutiny.
The high-density geographical nature of business in Zhejiang province plays a crucial role in the implementability of TaiLong Bank’s community-based loan approach. Those close-knit communities and the prevalence of family-owned businesses create a unique environment where information flows freely, and reputations are well-known locally. The bank’s ability to tap into this rich vein of community-based information allows it to make informed decisions with assess to creditworthiness.
It’s fascinating. In a market where state-owned commercial banks dominate the larger client segment and cutting-edge tech companies use data-oriented tools to target smaller consumers, TaiLong Bank has carved out a niche for itself by focusing on the unique needs of SMEs. Their success is a testament to the power of understanding and going back to how things actually works, meanwhile respecting and navigating the most charming pandora box – risk. It’s inspiring to see how a seemingly basic, mundane method can thrive in a highly competitive environment, proving that sometimes, a humanity touch can make all the difference.