CBRC’s Three Year New Rural Financial Institution Plan May Have Unintended Effects

What does it take to get more banks into poor rural areas? Apparently, by giving out banking licenses in the wealthy regions. That is what the CBRC is proposing in its Three Year Rural Financing Plan.

The CBRC plan, if successful, will bring China’s rural financial institutions to 1,294 by 2011 with a compound annual growth rate of 120%. Of the total, 853 financial institutions will be in the Central and Western regions of China. Rural financial institutions include village banks, lending companies, and rural mutual cooperatives.

Under the proposed plan, rural financial institutions in China’s wealthier regions can set up branches in rural areas, allowing funds to flow between them. For every one institution set up in China’s 100 wealthiest counties or large and medium city, the institution is allowed to set up one branch in a nationally recognized poor county or two branches in Central or Western China. Alternatively, for every two institutions set up in China’s Eastern region (not in one of the 100 wealthiest counties or large and medium city), the institution is allowed to set up one branch in a nationally recognized poor county or two branches in Central or Western China.

Reviewing CBRC’s expansion plan, there is a clear preference for village banks. Roughly 80% of the 1,294 institutions will be village banks, with rural banks at only 12% and remainder being lending companies.

However, the announcement doesn’t address the existing challenges of village banks such as the need for a licensed banking institution to be the majority shareholder with at least 20% equity. Such requirement has led to village banks to function like traditional banks focusing on larger loans and clients instead of focusing on microloans for the poor.

While the plan is to increase capital and lending in rural areas, the opposite might happen. Deepening on how CBRC monitors funds between the branch and headquarter, there is be a possibly for village banks to take deposits in rural area and use them for loans in the wealthier regions.

Unless more guidance is provided about how funds could and could not be used, CBRC may get more banks in the rural area, but not a lot of credit.

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