Rampant bridge lending posing threat to China’s financial market
September 5, 2013 Leave a comment
Rampant bridge lending posing threat to China’s financial market
Staff Reporter
2013-09-05
The increasingly popular bridge lending business, which involves providing capital to individuals or companies in acute need of funds to repay bank loans, is posing a threat to China’s financial market, Shanghai’s First Financial Daily reports. The lending practice is typically used by private lenders, who mainly provide bridge loans, or short-term loans, to small and medium enterprises in urgent need of cash by charging them extremely high interest rates. Under the practice, borrowers usually repay their debt after securing new bank loans, the paper said.According to a survey conducted among small businesses operating in eastern China’s Jiangsu province, 35 out of 50 enterprises which took bridge loans continued to take such loans even after repaying their bank loans using the method.
The survey also showed that the 50 businesses took an accumulated bank loans worth around 700 million yuan (US$113.5 million). Of this, more than 484 million yuan (US$78.5 million), or nearly 70%, was repaid with bridge loans.
Given their own lack of capital, businesses usually borrow short-term loans from non-banking financial institutions, private lenders and investment consulting companies to repay their bank loans in order to avoid capital disruption. Enterprises turning to bridge loans are usually in urgent need of money because the cost of such borrowing is normally very high, the paper said.
An owner of a car company said that he paid 20,000 yuan (US$3,200) in interest for borrowing 1 million yuan (US$163,300) over a 10 day period. The enormous cost involved in taking such loans usually exerts a huge financial burden, affecting the operations and development of enterprises, as well as their debt repayment ability.
Meanwhile, facilitating the brokerage process for bridge loans has become a grey business zone for banking staff in charge of offering credit and lending services, the First Financial Daily said. Bridge loans also pose an ethical dilemma for bank staff. This was made evident at a large bank in Wuxi, which found that capital flows between accounts of one of its employees and businesses had exceeded more than 100 million yuan (US$16.3 million).
The bank employee’s actions were reportedly aimed at helping enterprises evade the monitoring of capital flows by financial regulators, which have imposed regulatory restrictions on inquiries made about personal bank accounts.
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