program proceeds smoothly, the firms have the potential to become big players in the country's financial sector, they said.

Private lenders in action

"The trial program spells an opportunity for the underground lenders to carve a slice of the microfinancing pie," Zhou Dewen, Chairman of Wenzhou SME Development Association, told Shanghai Securities News. "It's a common dream for the private lenders to participate in the country's legal financial system."

Now the dream seems attainable. Small lenders that have no record of bad credit and receive approval from their shareholders could be transformed into rural banks, according to the directive. Then they could accept deposits and increase their lending activities. Observers say this is the real draw for underground lenders.

Since May, many underground lenders have asked the Wenzhou SME Development Association about obtaining microlending licenses, Zhou said. Among them was Fang Peilin, President of Wenzhou Fangxing Guarantee Co. Ltd. He submitted an application for a small-loan license to the Financial Office of Zhejiang Province in June.

Still, many uncertainties cloud the prospects for Fang and other would-be microlenders.

"Wenzhou has only 16 licenses while the number of candidate applicants is in the hundreds," Fang said. "But we'll spare no efforts to get one."

Besides this, CBRC regulations specify that the largest stakeholders of the country's rural banks should be banking institutions with no less than a 20-percent stake, while the holdings of other shareholders are capped to 10 percent each. This means that those who set up microlending firms will have to sell some of their shares to banks before they can establish a rural bank.

This is unacceptable to most private lenders, Zhou said, adding that the regulations must be improved. The provincial government should give new microcredit firms more support, because they could ease the pressure on commercial banks to finance SMEs, he said.