Inclusive Finance’s Success Breeds Host of Hidden Risks (AI Translation)

【周刊提前读】普惠金融逆势高增 有何隐忧？

The past seven years in China have seen rapid growth in inclusive small and micro loans, with the balance exceeding 35 trillion yuan—more than five times the amount at the end of 2017. These loans have grown from less than 6% of total loans to 13%. By the end of the second quarter of 2025, the balance stood at 35.57 trillion yuan, a 12.3% year-on-year increase, outpacing the overall loan growth rate by 5.2 percentage points. The main focus is on loans with a single credit of less than 10 million yuan, targeting small businesses and entrepreneurs[para. 1][para. 2]. State-owned banks, under regulatory pressure, have been key drivers in pushing inclusive finance due to their performance assessment metrics, which heavily weigh these loans. However, the sustainability of such rapid growth is questioned as economic conditions would ordinarily prompt banks to tighten credit, yet policy directives stress social responsibility and counter-cyclical lending[para. 3][para. 4].

Some banking insiders note that inclusive finance has supported many small businesses that survive primarily due to continued loan extensions, suggesting that cutting back now could worsen conditions for both firms and broader employment[para. 5]. However, the speed of loan growth has brought certain risks to light—rising non-performing loan rates have heightened risk management concerns, and low interest rates have encouraged behaviors like loan arbitrage and fraud, with cases of borrowers (sometimes aided by illicit intermediaries) faking documents to obtain loans. As of May 2025, the weighted average interest rate for newly issued inclusive small and micro enterprise loans fell to 3.69%, down 0.66 percentage points from a year prior, while property mortgage rates remain higher[para. 6][para. 7].

Authorities have responded with risk warnings and increased scrutiny over illegal loan intermediaries, though some industry sources believe the problem is regional, not nationwide. Nevertheless, given rapid business expansion under low rates and easy credit, loan quality inevitably becomes uneven and maintaining proper standards becomes crucial[para. 8].

The sector’s high growth started around 2018, driven by more stringent performance assessments. For example, in China’s four big state-owned banks, inclusive finance weighs more than 10 points in performance ratings, compared to just 2–3 points for other types of corporate lending. This has made inclusive finance a major focus for banks, reflecting not just commercial sustainability but also “political responsibility.” Regulatory requirements have shifted over time, from targeting high growth to now also emphasizing loan quality and structure[para. 9][para. 10][para. 11][para. 12][para. 13].

Large state-owned banks now dominate inclusive lending: at the end of 2024, they accounted for 42.77% of the market, with rural financial institutions’ share declining to 26.87%. Loan balances for the six major banks all surpassed 100 billion yuan, with Construction Bank leading at 3.41 trillion yuan. However, growth rates have started to diverge, with Agricultural Bank growing over 31% in 2024 but Construction Bank slowing to 12% due to a higher base and stricter risk management[para. 14][para. 15][para. 16][para. 17][para. 18].

Several factors contribute to the high growth of inclusive lending: the massive number of market entities (over 188 million in 2024, a 3.9% year-on-year increase), innovations in supply chain finance, and technical practices like splitting large loans among smaller borrowers (“large split into small”). Supply chain finance, in particular, has fueled loan expansion, with banks using core enterprise credit to support smaller suppliers[para. 19][para. 20][para. 21][para. 22][para. 23]. Regulatory bodies are working on standards to clarify and unify definitions for such loans to address inconsistencies and risks.

Economic headwinds have created new real financial needs for sectors such as catering that previously rarely borrowed. However, the risk of rising non-performing loans looms large, especially in collateral-backed lending as property values fall, making some borrowers more likely to default. Issues like inflated property valuations for loans (“high appraisal, high lending”) remain problematic, especially in real estate[para. 24][para. 25][para. 26][para. 27][para. 28][para. 29].

The proliferation of illicit loan intermediaries—who create fake documents or register shell companies to secure loans—has drawn regulatory and industry attention. This is exacerbated by low interest rates, tight liquidity among small enterprises, and intense bank performance pressures. Some believe long-term solutions will hinge on technology—using big data and digital tools to better assess credit risk. Leading banks like Construction Bank are pioneering these digital inclusive finance efforts, but fraudsters have adapted, posing ongoing challenges. Regulatory campaigns since 2023 have sought to crack down on illegal intermediaries, with more stringent warnings and enforcement in multiple regions since March 2025[para. 30][para. 31][para. 32][para. 33][para. 34][para. 35][para. 36][para. 37][para. 38][para. 39][para. 40][para. 41][para. 42][para. 43][para. 44][para. 45][para. 46].