The China Banking and Insurance Regulatory Commission (CBIRC)'s nod to the Jiangxi Yumin Bank makes it the first private bank in eastern Jiangxi Province and the 18th private bank in China.

With the private sector playing an increasingly important role in boosting China's economic growth, private banks have also seen rising policy support. When Premier Li Keqiang presented the annual Report on the Work of the Government before the national legislature in March, the document highlighted that more private and community banks will be established to better serve the real economy. More accessible and less costly than state-owned banks, private lenders are a means to promote inclusive finance.

Nine private enterprises have come together to set up the Jiangxi Yumin Bank with a registered capital of 2 billion yuan ($289 million), with agricultural company Zhengbang Group and new energy manufacturer B-Energy Group holding the lion's share—30 percent and 29.5 percent respectively. The new bank will focus on the local agricultural sector as well as small and micro enterprises.

The approval comes after a dry spell for private banks. The last one to get the green light was the Meizhou Hakka Bank in Guangdong Province in the south at the end of 2016. Experts say the regulator slowed down in issuing licenses because it needs time to better evaluate the long-term performance of the existing banks.

The first batch of private banks in China came up as recently as 2014. Their strength is reducing financing costs for companies and providing credit faster and with fewer red tape, especially through online banking.

Dong Ximiao, Deputy Dean of Chongyang Institute for Financial Studies at Renmin University of China, said private banks have helped improve China's banking system by easing the financing difficulties of small and micro enterprises in a targeted manner.

Small means flexible

According to Zong Liang, chief economist of the Bank of China, private banks enjoy an edge over state-owned banks since they have flexible management and can respond to market changes more promptly than the latter. However, he recommends they diversify their portfolios to prevent internecine war.

"To avoid homogenous competition, private banks should pursue diversified development, utilize financial technology, and further reach out to individuals as well as small and micro firms," he told Beijing Review.

China's private banks have been doing that to a large extent. Their shareholders come from various industries and they focus on different segments, usually the industries their founders come from. For example, the Bank of Sanxiang was established by 10 companies, including heavy equipment manufacturer Sany Group. The bank's clientele are from real-economy industries, such as equipment manufacturing, modern agriculture and healthcare.

There are also Internet-based private banks such as WeBank, China's first private commercial Internet bank founded in 2014 with Internet giant Tencent holding almost one third of the stakes; MYbank launched by e-commerce goliath Alibaba, and XW Bank backed by electronic wiz Xiaomi.

According to 2018 data, WeBank remains the frontrunner among the private banks in China. By the end of 2018, its total assets reached over 220 billion yuan ($31.8 billion) with a year-on-year increase of 169 percent. Most of the rest had less than 40 billion yuan ($5.8 billion) of total assets. WeBank also saw the highest net profit last year at around 2.4 billion yuan ($347 million).

Weilidai, a microloan product the bank launched in 2015 to provide small personal loans, is reaching low-income groups that traditional banks may not cover. Over 120 billion yuan ($17.36 billion) has been given out in small loans.

MYbank cut interest rates on loans and served over 12 million small and micro enterprises and individual sellers by the end of 2018.

Many private banks are stepping up their use of technology such as big data, cloud computing and artificial intelligence to better fend off risks such as non-performing loans (NPL) and provide smarter services.

According to WeBank, its input in research and development was 983 million yuan ($142.3 million) in 2018, up 53 percent year on year.

Risks and potential

Despite promising growth, the future is not going to be a bed of roses. Rising external tensions and slower economic growth at home have affected domestic industries and exposed private banks to more risks.

CBIRC data show that the NPL ratio of private banks increased by 0.15 percentage point to 0.68 percent by the end of May, compared with late 2018.

However, Zong stressed that the figure has been kept below 1 percent with the changes within a manageable range, given the small scale of private banks.

Many have maintained the quality of their assets. As of the end of 2018, the NPL ratio of the Bank of Sanxiang was 0 percent. Although MYBank saw its ratio reaching 1.3 percent, those of the rest were all kept below 1 percent.

As Su Xiaorui, a researcher with the China-based online finance information provider Madai Institute, points out, private banks are more vulnerable to risks than traditional banks.

Zong also sees a challenge in private banks' limited fund sources and clients. Meanwhile, small banks often lack the ability to cope with risks independently. "More supervision and regulations are needed to prevent risks emerging in private banks' operations, which will help their development," he said.

Lack of physical infrastructure is also a disadvantage, forcing private banks to rely on wholesale financing and Internet-based modes to expand client groups. Sometimes this may lead to problems. Last year, the Tianjin-based KCB Bank became the first domestic private bank that was fined for violating regulations in interbank business.

As Dong highlighted, Chinese private banks need to focus on improving targeted services instead of flooding to follow market trends and improve innovation to gain support from domestic regulators. Regulators can also ease restrictions so that more private banks can come up and participate in fairness-based market competitions.

With the CBIRC resuming approving private banks, more investors will be encouraged to float private banks, which will promote the utilization of private capital.

As China continues to open up its financial sector, more private banks are expected to be established.

Copyedited by Sudeshna Sarkar

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