Research On Risk Of Group Lending, A Case Study Of Hupai Holding Group

For most Chinese enterprises, there are few financing channels. This is especially true for small and medium-sized enterprises, which have difficulties in obtaining loans because they lack enough collateral. Against this background, group lending seems to be natural solution. Group lending is a successful practice in some countries. But a crisis broke out in 2012, exposing risks in this kind of lending. Why this lending mode failed? The root cause is inadequate risk management.This paper studies risks arising from group lending. It summarizes the basic concepts of group lending and its development in Zhejiang Province where small and medium-sized enterprises thrive. The province was badly hit by a lending crisis. In a case study, a robust enterprise was engulfed in a group lending crisis and went bankrupt. The enterprise was involved in a complicated joint liability lending network. There were hundreds of enterprises in this network. The crisis spread quickly and caused widespread effects. Analyses suggest that the crisis was caused by poor risk management in enterprises and banks. Proposals have been put forward to deal with the risks. Joint efforts should be made by enterprises, banks and regulating authorities. Banks should do more homework before and after loan granting and in credit rating. They need to evaluate an enterprise's assets before loan granting. After loan granting, banks should know the performance of the enterprise. When the enterprise encounter problems, banks should discuss with it and find a solution rather than simply withdraw their loans. Meanwhile, enterprises are urged to act cautiously in forming lending groups and properly manage their loan size. They need to find the best sources of financing. They should avoid being involved in an unnecessary joint liability network. When joint liability is necessary, they should choose the enterprises they know best as their group members. This can protect them from adverse selection. Regulating authorities are supposed to establish multi-tier capital markets and expand financing channels for small and medium-sized enterprises and set up loan loss provision when practicable.Study indicates that group lending is a useful way of financing, so long as enterprises and banks strengthen their risk management. This kind of lending has some advantages. For banks, it reduces risks they will face. And for enterprises, it facilitates their access to bank loans.