CHEN Wenxiu, a 53-year old villager in Jincheng town, Yilong County of Southwest China’s Sichuan Province, applied for a 4,000-yuan loan from the Huimin County Bank last month.
Her family needs the cash to buy more pigs and restore its piggery this spring to generate better earnings this year.
She obtained the loan from the newly established bank just a day after her application. After a spot check on her family and an assessment of its ability to repay, the bank promptly offered the loan, and that too without any collateral.
Chen is among the first group of farmers to benefit from the country’s latest move to build a diversified rural financial system with extensive coverage.
In late December, China Banking Regulatory Commission (CBRC), the banking regulator, scrapped working capital limits for rural financial institutions, encouraging commercial banks, private enterprises and even individuals to engage in the sector.
Huimin County Bank and a few other new rural financial institutions were established in March under this pilot program in Sichuan, Gansu, Qinghai, Hubei and Jilin provinces, and Inner Mongolia Autonomous Region.
CBRC statistics show that by November, some 70.7 million rural families had access to microcredit and other forms of loans designed specifically for farmers. In other words, nearly two-thirds of the rural population have to look beyond the mainstream financial institutions for credit.
Within 15 days of opening, Huimin County Bank received deposits of over 2.15 million yuan from more than 400 households and gave out nearly 270,000 yuan in loans to farmers and small rural businesses.
And among the 14 lendings, eight were small loans to farmers, under 20,000 yuan, with no collaterals.
The establishment of new financial institutions, including village banks, rural lending companies and cooperatives will not only help meet farmers’ financial needs, but also help stimulate the restructuring of the rural financial sector as a whole.
New financial institutions will exert much-needed competitive pressure on China’s national network of rural credit cooperatives, the backbone of rural finance, says Wang Jun, a finance specialist at the World Bank office in Beijing.
“If they don’t get their act together they may be wiped out altogether, not right away, but in the longer term,” he says.
Under the new rules, established banks must hold at least a 20% stake in the new village banks, and each private investor is limited to a maximum stake of 10%.
Wang Jun from World Bank wants more investors to be allowed in to fill the gap in the rural financial market. He says he has already received numerous enquiries from Chinese entrepreneurs who sense “a once-in-a-lifetime chance to become bankers”.
Other supporting policies are also needed to involve more players, such as liberalised interest rates and reduced taxes, industry experts say.
Tang Min, an economist at the Asia Development Bank, suggests high interest rates to match the high risks of rural financing.
Loans offered by microcredit institutions in Pingyao, Shanxi Province, for example, carried annual interest rate as high as 18%.
But even though this rate was about three times higher than mainstream bank loans, the borrowers were far from devastated. On the contrary, there were no records of default in 2006.