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Rural Finance's Revival Strains Regulators

05-07 08:29 Caijing

Big banks are accepting government invitations to expand into rural financial services, forcing regulators to play catch-up.

By staff reporter Zhang Yuzhe

(Caijing Magazine) On paper at least, and with the help of government incentives and tax breaks, China's rural financial network is coming back to life.

The China Banking Regulatory Commission (CBRC) recently reported that, between 2006 and late January, more than 100 rural financial institutions had been established across the country. These include village banks, lending companies and credit unions approved by CBRC.

The number is expected to grow; one expert estimated that more than 1,000 new rural financial institutions will be needed to provide basic coverage in all of China's towns and villages, as the government has planned.

But regulatory bottlenecks may impede future progress. A CBRC regulator told Caijing that new rural financial institutions face high risks, and that now "the most urgent problem for regulators is that they lack regulatory resources and power."

A workable system for rural financial services is considered crucial to stimulating demand outside China's cities and balancing the nation's urban-oriented economy. Encouraging rural financing is considered by the State Council a key reform area connected to the overhaul of state-owned banks.

Rural financing agencies were popular in the 1990s until supervisory holes led to huge losses for depositors. That experience provided key lessons for the latest reform push. But much more will be needed to strike a balance between the network’s development and its regulation.

Steady Expansion

CBRC lowered the threshold for access to the rural financial market at the end of 2006. The move was considered the most important breakthrough for the sector, prompting a steady influx of new institutions.

According to CBRC's latest statistics, the 108 rural financial institutions operating at the end of January included 92 village banks, 10 rural credit unions and six loan companies.

These institutions reported combined equity of 4.2 billion yuan, 6.2 billion yuan in deposits, outstanding loans worth 4.2 billion yuan and total lending of 5.5 billion yuan, 95 percent of which went toward small, rural businesses and farmers. Institutions operating in the black booked 10.03 million yuan in profits in 2008. The average non-performing loan rate was only about 0.4 percent, with half that bad debt linked to a May 2008 earthquake in Sichuan Province.
Commercial banks are the major backers for new village banks and loan companies. China Development Bank (CDB), for example, has established a sector-leading seven village banks. Agricultural Bank of China, China Construction Bank, Bank of Communications and Minsheng Bank have set up village banks as well. Reportedly, ICBC and Bank of China are applying for their own village banks.

Foreign banks are involved, too. HSBC opened its fifth village bank -- Guangdong Enping HSBC -- at the end of March. Standard Chartered Bank has a village bank, and Citibank has set up a loan company.

Ji Lin, executive vice mayor of Beijing, has said the city will encourage expansion of rural finance. A goal is to open more than 20 micro-finance companies and eight village banks in 2009 in the greater Beijing area.

Luo Guang, director of the Chongqing Financial Affairs Office, told Caijing that his municipality plans to establish 15 village banks this year. Meanwhile, a source at the Hunan Banking Bureau said his province plans to set up more than a dozen village banks and ensure that every prefecture-level city has at least one, new rural financial institution.

CBRC has drawn up a three-year development plan for the new bank and lending institutions, in step with State Council requirements. The plan’s main thrust is to expand the sector.

Zang Jingfan, a CBRC director, said the commission would like all towns and villages to be linked to the rural financing system within three years. "It doesn't mean a full coverage of institutions, but a full coverage of financial services,"Zang said.

CBRC's Web site lists more than 2,000 rural areas around the country eligible for, but still without, financial institutions. Investors are being invited to choose open slots.

"There are far fewer open slots viable for financial services,"Zang said. "Therefore, establishing new rural financial institutions should take financial sustainability into consideration. Places such as Sichuan and Tibet need special support from the government due to high costs."

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