# Presentation: 267462

## China’s Rural Finance Reform

**Jiang Liming**
**Deputy Director General**
**Cooperative Finance Supervision Department**
**China Banking Regulatory Commission**
**May 22, 2008**
**Dallas, Texas**

## Contents

**Introduction**
- 1.**Reform of Rural Credit Unions (RCUs)**
**2.Policy Innovation Concerning the Market Entry of Rural Financial Institutions **
**3.Agricultural Development Bank and the Evolution of Its Functions **
**4.Breakthrough on Postal Savings Institutions Reform **
**5.The Restructuring of the Agricultural Bank of China **
**6.Differentiated Supervision of Rural Financial Institutions**
**7. Challenges Facing the Reform of Rural Finance**

## Introduction

- China is a developing agricultural country with a population of 1.3 billion. The “three agricultural issues” (namely, agriculture, countryside, and peasant) is one of the most essential issues for the government
- The government has always been attaching great importance to the development of “three agricultural issues” and the reform of rural finance
- Ever since China's opening-up, the government has been taking constant efforts in rural finance reform, improving the service system in rural areas and strengthening the supervision to rural finance intuitions through a series of strategic arrangements and policy measures

## Introduction

- Policy bank
- Agricultural Development Bank(ADB)
- Commercial banks
- Agricultural Bank of China(ABC)
- Postal Savings Bank (PSB)
- Rural cooperative financial institutions
- Rural Credit Unions (RCUs)
- Rural Commercial Banks
- Rural Cooperative Banks
- New types of rural financial institutions
- Township and Village Banks (TVBs)
- Rural Loan Companies (RLCs)
- Rural Mutual Cooperatives (RMCs)

## Introduction

**As of the end –2007:**
- The total assets of the above institutions amounted to RMB 14.7 trillion, 27.6% of total banking assets
- Debts RMB 14.2 trillion, 28.4% of total banking debts
- Deposits RMB 11.9 trillion, 29.5% of the total banking deposits
- Loans RMB 7.9 trillion, 27.6% of the total banking loan
- The total loan outstanding related to agriculture has reached RMB 6.09 trillion, of which direct agricultural loan amounted to RMB 1.57 trillion
- The proportion of household that have access to banking loan reached 33%, from which more than 300 million farmers benefited

## 1.Reform of Rural Credit Unions (RCUs) 

**At beginning**

**Cooperative financial institutions provid****ing**** services to their**
** ****cooperative members on the basis of mutual assistance**

**Recent years**

**cooperative institutions ******** ****stock corporation institutions **
**or joint stock institutions**** **

**Some of them have been restructured into rural commercial**
** ****banks or rural cooperative banks**

**The history of rural credit unions can be traced back to more than 5 decades ago**** **

## 1.Reform of Rural Credit Unions (RCUs) 

**RCUs have been playing an active role in supporting farmers and rural enterprises**
- Largest network
- 8509 RCUs legal entities with 70,000 branches.
- Extensive clients base
- 78 million farmer customers
- Take the leads among all rural financial institutions measured by agricultural loan and rural household loan granted
- deposit balance RMB 3.2 trillion, loan outstanding RMB 1.4 trillion and household loan RMB 1.2 trillion

## 1.Reform of Rural Credit Unions (RCUs) 

| Managerial mechanism  | The risk management responsibility of rural credit unions has been transferred from the People’s Bank of China to local provincial government  |
| --- | --- |
| Ownership  | New types of ownership structures such as stock cooperation and joint stock institutions have been created  |
| Form of organization  |   137 rural commercial banks and rural cooperative banks have been established on a pilot basis. Meanwhile, reforms has been carried out to the unified legal person system in 1848 rural credit unions |

**Since 2003, the CBRC has launched RCUs reform on a pilot basis**

## 2. Policy Innovation Concerning Market Entry of Rural Financial Institutions

**At the end of 2006, the CBRC relaxed market entry threshold for banking institutions in rural areas**** **
**     ****Two Liberalizations****:**
- Capital liberalization: Various types of social capital, including non-government capital and foreign capital are welcomed to participate in rural finance
- Institutional liberalization: Investors are allowed to set up new types of rural financial institutions such as township and village banks, loan companies, and rural mutual cooperatives.  And commercial banks and rural cooperative banks are encouraged to establish branches in rural areas

## 2. Policy Innovation Cocnerning Market Entry of Rural Financial Institutions 

**"Lowering market entry threshold, while strengthening prudential supervision" **
- Lower the market entry threshold: Relax market entry restrictions on  institutions and business scopes, increasing the coverage of financial institutions in rural areas
- Lower requirement on registered capital.  Minimum capital--
- Township and village banks: RMB 1 million
- Loan companies: RMB 500,000
- Rural Mutual Cooperatives: RMB 100,000
- The minimum registered capital for rural cooperative banks is reduced from 20 million to 10 million, and rural credit unions from 10 million to 5 million
- Quantity and proportional restriction for rural financial institutions to set up braches in counties, towns and villages are lifted up
- Lower requirements on the qualification of investors and the the investment cap for domestic investors
- Revise authorization rights for newly established legal entities or branches

## Strengthening prudential supervision:  strengthening the enforcement of supervision measures, and an enforceable market exit mechanism in place
Newly established banking legal entities should classify their assets in line with prudential requirements 
Capital Adequacy Ratio should be no less than 8%
Provisioning Coverage Ratio should be no less than 100%
Prudential requirements on internal control, asset concentration and liquidity should be satisfied 

- Newly established banking legal entities should classify their assets in line with prudential requirements
- Capital Adequacy Ratio should be no less than 8%
- Provisioning Coverage Ratio should be no less than 100%
- Prudential requirements on internal control, asset concentration and liquidity should be satisfied

**2. Policy Innovation Concerning Market Entry of Rural Financial Institutions**

## 2. Policy Innovation Concerning Market Entry of Rural Financial Institutions

**Since Oct. 2007,**** the pilot reform has been expanded from the original 6 provinces to 31 nationwide**
- 38 new types of rural financial institutions have obtained licenses, among which 25 are township and village banks, 4 are loan companies and 9 are rural mutual cooperatives.
- CitiBank, HSBC and Grameen Trust are actively involved in the pilot reform either by direct investment or by providing technical supports
- The total capital drawn from various sources amount to RMB 530 million, with 840 million in deposit and 450 million in loan

## 3.Agricultural Development Bank and the Evolution of Its Functions 

- The ADB was founded in 1994. Originally, it was a specialized policy bank providing funds for the government to purchase grain, cotton, and edible oil in rural areas
- The business scope of the ADB have extended greatly in recent years.  Now it not only provides loans for agriculture, forestry, animal husbandry, sideline production and fishery production, but also for agricultural processing industry and technological agriculture industry
- At present, the ADB network covers 2174 branches nationwide, with deposit balance RMB 107.0 billion, and loan outstanding more than RMB 1 trillion. Its total assets amount to RMB 1.1 trillion

## 4.Breakthrough on Postal Savings Institutions Reform 

- A nationwide postal saving system was established in 1986 when postal institutions started taking deposit. Deposits taken were all submitted to the PBoC
- In 2004,the deposit-taking business and postal business of postal institutions are separated from each other. And deposits were divided into two categories: deposits taken before the reform would remain in the PBoC account, while the new deposits would be kept in each institution's own account for use
- In 2007, postal savings institutions were officially changed into Postal Savings Bank to further enhance its function in serving agriculture
- Till the end of 2007, the branches of the Postal Savings Bank had exceed 37,000, deposit balance RMB 1.7 trillion, loan outstanding RMB 113.4 billion, and total assets exceeding RMB 900 billion

## 5. Restructuring of the Agricultural Bank of China 

- The ABC is a large rural commercial bank in China
- It was initially designed to provide specialized agriculture-support loan and long-term agricultural loan.  In the course of its commercialization, the ABC has expanded its business network to both cities and villages, providing comprehensive services for its clients
- By the end of 2007, the ABC owned a network of 27,000 branches, deposit balance RMB 5.3 trillion, loan outstanding RMB 3.5 trillion, and total assets RMB 6.1 trillion
- The government is pushing forward the ABC reform steadily in line with "serving three agricultural issues, overall restructuring, commercial operation, and going public", and has achieved plausible progress.  Particularlyon the issue of a proper relationship between commercialized operation and the needs to serve agriculture of the ABC

## 6.Differentiated Supervision of Rural Financial Institutions

- While applying uniform supervisory criteria to all institutions in terms of loan classification, capital adequacy, and risk management supervision, the CBRC also takes fully consideration of the differences between each institution and applies different policies accordingly
- Different supervisors are designated for different legal entities
- Different supervision policies are applied to institutions with different features
- Different supervision measures are given to institutions with different supervisory ratings

## 6.Differentiated Supervision of Rural Financial Institutions

- The CBRC offer active window guidance on how to best support the development of agriculture, encouraging financial institutions to develop collateral free credit facilities such as micro credit and cross-guaranteed credit
- the CBRC has been steadily enhancing the coverage ratio and business scope of micro credit through financial innovation
- The qualified to lender of the micro credit: from rural credit unions to all banking institutions
- Qualified industries for micro credit: from planting and breeding industry to all agricultural related businesses
- The line of credit: from 3000-5000 RMB to 10,000-3 million RMB
- Credit duration: from within one year to 1-3 years
- Interest rates: from only fixed rates to both fixed and floating rates
- Micro-credit business plays a positive role in increasing peasants’ revenue and production

## 7.Challenges Facing the reform of Rural Finance

**Further improve the rural financial system**
- Enlarge the business scope of the policy bank, and improve its role in providing credit in areas that commercial banks would usually be unable or reluctant to service
- Strengthen the social responsibility of large commercial banks, and enhance their service by virtue of their vast network
- Further reform rural financial cooperative institutions' management, ownership structure, and corporate governance, realizing its central role in supporting agriculture
- Accelerate the development of new types of rural financial institutions, and enlarge their financial networks in less developed areas and insufficient competition regions

## 7.Challenges Facing the Reform of Rural Finance

**Strengthen the institutional system of rural finance **
- The matter of collaterals: Expand the scope of qualified collaterals and study the feasibility of new types of collaterals such as orders, bills of lading, and account receivable to tackle the issues of the absence of collaterals and increase accessibility for loan in rural areas
- The problem of insurance: Accelerate the building up of a rural insurance system. Expand the scope and amount of the subsidies for commercial agricultural insurance
- The issue of interest rates: Continue the reform on the liberalization of interest rate system, allowing financial institutions to set their own rates in line with the credit condition of their clients and prospective income

## 7.Challenges Facing the Reform of Rural Finance

**Construct a better rural finance policy supporting environment**
- Discount policy for agriculture loan
- favorable tax policies
- favorable monetary  policies

## Thank you!