A Mutual Guaranty Loan is defined as a loan transaction in which more than three borrowers form a group to borrow collectively and guaranty the loan for each other. Even though the borrowed loan can actually be used by only one member of the group, in the case of default, all other members have to declare themselves willing to share the repayment of the loan.
Because the borrowers of microloans are typically SMEs with relatively low credit scores and inadequate collateral, forming a group may help increase the borrowers’ credibility and reduce risks. Because the groups self-select, the members of the group may have better knowledge about the other members of the group than would a commercial bank or third party; this would reduce a significant amount of uncertainty.
Also, because the quality of the other members’ credit impacts the borrowing firm, the firm will be predisposed to only select other firms with true loan demands, stronger repayment ability, and sound credit. Therefore, in some sense, by the time a group submits a loan request to banks, the borrowers have already been somewhat pre-filtered. Meanwhile, since the group members know each other in some way or another, they are in a better and more convenient position to monitor the fund use of the eventual borrowers/fund users, and are more able to push the borrower to repay the debt on time at maturity.
Because the majority of the borrowers of Mutual Guaranty Loans are SMEs, the value of each individual loan is typically in the range of RMB 2 million to RMB 10 million. The percentage of all microloans that are currently Mutual Guaranty Loans is still small, only about 5 %, despite the rapid growth of this product in past years.
However, the total actual number of SMEs that are involved in these transactions may be much higher than the percentage suggests.
From an industry perspective, Mutual Guaranty Loans appear to be more concentrated in certain industries. About 50 % of all Mutual Guaranty Loans can be found in wholesale trading industries, since firms in these areas typically don’t have a large number of fixed assets to use as collateral, and trading partners in the wholesale market can be conveniently selected to join a Mutual Guaranty Loans group.
The manufacturing industry with high labor intensity and low capital is another industry with a relatively high number of Mutual Guaranty Loan transactions.
Since firms in the industry are typically located in a development zone or an industrial park, it is also relatively easy to find group members who can participate in the group loan.
Geographically speaking, there are more Mutual Guaranty Loan transactions, in terms of absolute value, in the southern and eastern areas of China, where more SMEs are located. However, in the mid-west areas of China, there are more Mutual Guaranty Loan transactions as a percentage of total loans obtained, since the challenges in SME financing are more severe in those areas; as a result, a higher percentage of SME loans have to take the form of Mutual Guaranty Loans.
The Risks Pertaining to Microloans The Procedure of Mutual Guaranty Loans
Loan, Microloan
Great articles!
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