Analysis of Economic Environment of Village Bank: A Case Study in China. DING Zhao, XIANG Zhenyu, JIANG Yuansheng

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1 Analysis of Economic Environment of Village Bank: A Case Study in China DING Zhao, XIANG Zhenyu, JIANG Yuansheng DING Zhao, Master degree candidate, College of Economic & Management, Sichuan Agricultural University. Postal Address: Sichuan Agricultural University. Wenjiang Chengdu Sichuan , China XIANG Zhenyu, Vice-president of Bank of Communications Dujiangyan Sub branch. Dujiangyan Chengdu Sichuan China Prof. Dr. JIANG Yuansheng. Deputy Dean, Faculty of Economics and Management, Director, Sichuan Center for Rural Development Research, Sichuan Agricultural University. Wenjiang Chengdu Sichuan , China Abstract The establishment of village banks in china is based on the background of financial service shortage and that has increasingly become a bottleneck restricting the development of agriculture and villages. Research on the economic environment of village banks is conducive to recognize the operation status deeply. The paper has analyzed the financial capacity, relationship between village banks and related financial institutions, the capacity of absorbing deposits, taking back loans and earning of village bank in three aspects of macro, medium and micro through case study of Dujiangyan Jindu Village bank, separately. The study has found out that this village bank possesses a large market space, while the inter-bank competition is stiff. Improving social recognition, enhancing competitiveness through intermediary business, innovating financial products and service and paying attention to talent introduction and training can enable sustainable development of this bank. Keywords: Village bank; Economic Environment; China 1. Research background At the present stage, the shortage of Chinese financial services in rural areas has become a bottleneck restricting income increase of farmers, development of agricultural capacity and growth of rural economic. At the end of 2006, China promoted a pilot program on the new type of rural financial institutions in terms to solve the problem of insufficient supply of rural finance, which contains three categories i.e., Village bank, Rural Mutual Financial Cooperative and Small-loan Company. By the end of 2012, China has established more than 1000 Village banks and its branches. There are more than 40 village banks in Sichuan province. Village bank is the most important part in the rural financial system and a significant way to attract capital to support local economic construction. At the same time, it is also the inevitable requirement of the development of rural economy and has an important significance to solve the inadequate supply of rural finance and credit difficultly. Thus, there is a certain theoretical and practical significance to research on the economic environment of village banks, which would be helpful to alleviate the supply shortage in rural COPY RIGHT 2013 Institute of Interdisciplinary Business Research 57

2 finance market, meet the diversified needs of farmers, and establish orderly competition in rural finance market under the current economic conditions. 2 Research Review According to the definition of Provisional Regulations on the management of village bank from the China Banking Regulatory Commission in 2007, village bank is the banking financial institutions that is authorized by China Banking Regulatory Commission, funded by domestic and foreign financial institutions, domestic non financial institutions and natural person, and established in rural areas, providing financial service for the local farmers, agricultural and rural economic betterment. From the view of concept, PENG Hao and XING Xin (2010) thought the establishment of village banks aims to form a financial service system which provides diversified investment channel and financial products, comprehensive coverage and efficient service. From the view of nature, WANG Hai-yan and FANG Shoujun (2011) pointed out village banks have reduced the access threshold in policy mechanism, which not only encourages various financial institutions to increase financial supply, but also an incremental reform that is different from the stock reform previously. From the view of current situation, LI Jia-xun and LI Fengju(2011) believed that there are mainly three features exhibited in Chinese village bank, which are slow growth speed, low enthusiasm of large commercial banks and the doubt of their establishment motives. From the view of foreign development reference, Chinese village bank is set up on the theoretical foundation of the community banks in the western nations. It also belongs to the community bank theoretically, whose establishment and management is under the principle of market, providing services to small and mediumsized enterprises and individual customers mostly (ZHAO Zhi-gang and BA Shu-song, 2011). At present, the research can be summarized from both favorable and unfavorable aspects on the operating environment of village banks. On the aspect of favorable, the first is the policy. In the Chinese Twelfth Five Year Plan, it is said that the government will further increase the intensity in supporting agriculture, benefiting farmers and building countryside. XIN Ben-sheng(2011) is optimistic about the longterm rural economy. He believes there is a huge potential of capital demand in rural area, and some related preferential policies are just to encourage local financial institutions to establish village banks, revitalize the funds in rural area. Second is the market positioning. ZHANG Hui-xian (2010) and ZHAO Le-feng (2011) pointed out that rural finance has become a deadly short board due to its low financial institutions coverage and insufficient financial service in rural area. This was in contrast to the variety financial institutions and abundant financial products in urban area, which also reflected that there is a broad space of the rural financial market on the other hand. Third is the operation mechanism. Village banks based on the rural financial market, offer loans in medium and small scale, provide personalized and differentiated services for distinct needs from farmers and corporations, and pay attention to the fast, efficient and flexible service (LIU Jin-hui and TANG Qing-sheng, 2009). On the aspect of unfavorable, firstly, the support policy is insufficient. HOU Xin (2011) pointed out that although the state has issued a series of fiscal, tax and other preferential policies, many policies are not implemented in the running. Secondly, the environment is pessimistic. Village bank is the bank of farmers own, and also the banker to the poor. Due to the vulnerability of agricultural production, village bank is facing great natural risk and market risk (PENG Hao and XING Xin, 2010). Thirdly, the related law has defects. LI Jing-xia(2011) considered the conditions for establishment, the standing rules and the sphere of COPY RIGHT 2013 Institute of Interdisciplinary Business Research 58

3 business have found there was no basis in the Law of The People's Republic of China on Commercial Banks, Law of The People's Republic of China on Banking Supervision or other laws. Fourthly, the competitiveness is lacking. XIN Ben-sheng (2011) believed compared with the Postal Savings Bank of China and Rural Credit Cooperatives, village banks have no other advantages except the short decision chain and flexible operation mechanism. Village banks have the absolute disadvantage regard to financial strength, the number of outlets, customer base and the deposit and loan market share etc. In addition, village banks still hold the risk of internal control(hu Lin, 2011), the risk of liquidity resulting from their incapability of managing deposit and loan business trans-regionally(kuang Lei, 2011), the risk of credit funds due to the income of farmers affected by natural condition(lv Zhi-ping, 2011). Above all the research the papers has reviewed and presented, village bank has attracted increasing attentions both theoretically and practically, which provides a valuable reference for the following research. However, the existing researches mostly speak generally, lack of typical case study. Accordingly, this paper intends to take the Dujiangyan Village bank as a case study, analyze its management and economic environment and discuss how to promote its sustainable development in this situation, based on the former research results both at home and abroad. 3 Analysis of operational economic environment 3.1 General situation of study object Jindu village bank is the unique one in Dujiangyan city. The city is a famous tourist one for its Dujiang Weir and Mount Qingcheng, and belongs to Chengdu economic circle and is a region of a higher degree of economic development. Dujiangyan Jindu village bank is sponsored by Panzhihua City Commercial Bank, funded by Dujiangyan City Construction Investment Co. Ltd., Chengdu Guangda real estate development Co. Ltd. and among other eight outstanding enterprises in Beijing, Tibet, Chengdu etc. The village bank is officially established on the December 2008, and the register capital is RMB80 million Yuan. This article would analysis the operational economic environment in three aspects which are macro, medium and micro. 3.2 Macro environment The operating environment of village banks directly affect by the local agricultural economic development level because these banks are mainly serve local farmers, agricultural production and county construction. Figure 1 showed that in the past decade, Gross Regional Product (GRP) increased rapidly and constantly except the large fluctuation in 2008 caused by The 5.12 Wenchuan Earthquake. While the Gross Output Value of Agriculture, Forestry, Animal Husbandry and Fishery (GOVAFAF) growth sustainably, the growth rate is extremely slow. In addition, figure 2 pictured that although the income of urban and rural residents have increased, the income gap is still widening in Chengdu. Nevertheless, the agricultural output is not equal to other industries and the incomes of rural residents are not as good as urban residents, this does not indicate that the overall economic environment is pessimistic for the operating of Dujiangyan village bank. COPY RIGHT 2013 Institute of Interdisciplinary Business Research 59

4 Figure the Gross Regional Product (GRP) and Gross Output Value of Agriculture, Forestry, Animal Husbandry and Fishery (GOVAFAF) of Dujiangyan Figure Annual per Capita Net Income of Rural Households (APCNIRH) and Annual Per Capita Disposable Income of Urban Households (APCDIUH) of Chengdu Accordingly, calculate the financial capacity and analyze the financial gap can effectively determine the economic environment that the regional financial institutions are faced with. Financial capacity, refers to the amount of financing, is the largest and most suitable quantum in a nation or a region under certain economic conditions. Therefore, the study establishes the following financial capacity model due to the correlation between financial capacity and economic aggregate, according to the theory of financial-economic ratio relationship from an American economist Goldsmith: M=K G In the formula, M indicates the financial capacity; K is the coefficient of economic and financial capacity; G represents economic aggregate, the Gross Regional Product (GRP). Taking relevant economic date in to the former formula, we can obtain the financial capacity of Duajignyan rural areas as show in table 1. COPY RIGHT 2013 Institute of Interdisciplinary Business Research 60

5 Table Dujiangyan rural financial capacity (Million Yuan) Year G K M1 H M2 M3 M4 Rural Financial Gap1( M1= M1-M4) Rural Financial Gap 2( M2=M3- M4) Rural Financial Gap Rate( M2/ M4) % % % % % % % % % % % % Note: Analysis will not consider the data in the year 2011 for this time due to the atypical change of the financial gap result from the considerable fall of the number of agricultural population. Data sources: China Statistical Yearbook 2012, Sichuan Statistical Yearbook 2012, Chengdu Statistical Yearbook and Dujiangyan Statistical Bulletin COPY RIGHT 2013 Institute of Interdisciplinary Business Research 61

6 In the table 1, G is Gross Output Value of Agriculture, Forestry, Animal Husbandry and Fishery (GOVAFAF) of Dujiangyan. K, the coefficient of economic and financial capacity, is the average numeral number in the entire nation. So the rural theoretical financial capacity M1=G*K. H represents the households net income. M2 (revised rural theoretical financial capacity) =M1-H. The practical rural financial capacity M4 can be divided into three sections which are currency, credit currency and capital money separately. The financial capacity supplied by capital money is precious little due to the underdeveloped rural economy; the practical rural financial capacity in the paper is the sum of per capita net income of farmers and the amount of agricultural loans of financial institutions, on behalf of the currency and credit currency separately. Figure Rural Financial Gap Rate in Dujiangyan City The data in table 1 and the fluctuation pictured in figure 3 exhibits the financial capacity in Dujiangyan rural area is extremely inadequate in the last decade. From the beginning of 2000, the financial gap was continuing expanding, the gap rate fluctuated between 25% and 30% mainly. This situation not only explained urban and rural financial supply and demand is unbalanced and the gap is last expand, but also uncovered the expanding gap between rural economy and urban economy. To fill and lessen the gap, we need to establish an inner balance mechanism in the economy through attracting and utilizing private capital, to meet the different financial demands of various economic entities. Thus, Dujiangyan village bank would have an abundant and promising develop space. At the same time, Dujiangyan Jindu village bank was established in late 2008, while it has not contributed to lessen the financial gap, which indicates the village bank, is faced with an enormous market and potentially dynamic macro environment on the other hand. 3.2 Medium environment The organizational structure of banking industry in China can be divided into five parts of central banks, regulators, self-regulatory organizations (SROs), banks and non bank financial institutions. The banks also include six categories of policy banks, large commercial banks, small and medium-size banks, rural financial institutions, China Postal Savings Bank and foreign bank, as shown in figure 4. In the Dujiangyan banking industry, the main competition of village bank are the commercial bank, in large and medium size, and the China Postal Saving Bank. COPY RIGHT 2013 Institute of Interdisciplinary Business Research 62

7 Figure4. The Banking Organization Structure in China 3.2.1Village bank and Commercial Banks The essence of village bank is small commercial banks in rural areas, local farmers and small and medium-size enterprises are their main customers, and who has both connections and differences with general commercial banks. Their common points are follow the manage principle of commercialization, pursue profits and avoid risks, and main difference performance in develop policy, regional advantage and service object and radius. Although there is a great advantage of village banks in rural areas compared with large commercial banks, the gap of deposit amount (Figure5) cannot be ignored. While when compared with small and medium-size commercial banks, the deposit of Jindu Village bank is roughly the same as, and even bigger than Industrial Bank and Nanchong City Commercial Bank, which reflect the village bank possess an advantage with the outside small commercial banks(figure6). COPY RIGHT 2013 Institute of Interdisciplinary Business Research 63

8 Figure5. The Deposit of Jindu Village bank and Lager Commercial Banks in Dujiangyan City Figure6. The Deposit of Jindu Village bank and Small and medium-size Commercial Banks in Dujiangyan City 3.2.2Village bank and China Postal Saving Banks China Postal Saving Banks is the fifth largest bank in the nation that established by China Postal Company in early 2007, mainly serve the rural financial market, such as local farmers, individual business, private entrepreneurs and other economic entities. The uppermost service of this bank is deposit, and loan as a supplement that contained four main loan products of the peasant joint guarantee loan, the farmers guarantee loan, business joint guarantee loan and business guarantee loan. And she is the bank with largest number of business outlets in the world through utilize the business department of post office, which contribute her more attractive in rural areas. COPY RIGHT 2013 Institute of Interdisciplinary Business Research 64

9 Figure7 has pictured the deposit of China Postal Saving Banks showed a steady growth while the amount of loan was tiny in Dujiangyan city. The gap between deposit and loan was increasing year by year, which means the capital was of low level of utilization. Deposit of the village bank has fluctuated in 1.2million Yuan since Although the amount of deposit of the village bank was less than China Postal Saving Banks, while the amount of loan was far greater than the later one, and the utilization of capital was higher as well. Figure7. The deposit and loan of China Postal Saving Banks and Jindu Village bank 3.3 Micro Environment The micro environment of village bank can be analyzed from her own three aspects of the capacity of absorbing deposits, taking back loans and earning The capacity of absorbing deposits The capacity of absorbing deposits refers to the amount of deposit the village bank can absorb from local farmers and small and medium-sized enterprises, is an important manifestation of the operation ability, and can be measured by the model: The capacity of absorbing deposits=deposits/registered capital. Then we can obtain the line chat of the capacity of the village bank. COPY RIGHT 2013 Institute of Interdisciplinary Business Research 65

10 Figure8. The capacity of absorbing deposits of Jindu Village bank Limited by the database, this capacity can hardly compare with other financial institutions. Therefore, from the view of its own, the capacity of absorbing deposits of Jindu Village bank has represented a dramatic increase from the beginning of Jun.2010 before a short stationary phase, and the number has fluctuated in 16 after These changing conditions illustrate the capacity unceasing enhancement, while is in the small fluctuations but relatively stable stage at present. The situation of the village bank is generally good and the rural financial service has been improved greatly The capacity of taking back loans This capacity is a significant evaluate factor of resisting risks for banks. By the end of the year 2011, Jindu Village bank had no non-performing loans. The capital adequacy ratios, risk provision coverage ratio and provisioning coverage ratios were 16.39%, % and 10.13% separately. Accordingly, facing a high risk of rural financial market, this village bank had prepared well for fighting risk and equipped with strong capacity of taking bank loan The capacity of earning The profitability is an important index to evaluate the comprehensive development capacity, is the embodiment of operation efficiency. Strong profitability means sufficient market competitiveness, which is the aspect the village bank should enhance for sustainable development. In the year 2011, Jindu Village bank had profited 36.8 million, paid taxes 12million totally, and the profit ratio was 46%. The capacity of earning of the village bank is favorable. 4. Conclusion and Suggestions 4.1Conclusion According to the reasoning the paper has represented, we can conclude the operating environment, in macro, medium and micro levels as follows. ⑴large financial gap provides a broad development space for the betterment of village bank in Dujiangyan areas. While the insufficient policy supports need village banks explore their own suitable, efficient operating strategy in different regions. COPY RIGHT 2013 Institute of Interdisciplinary Business Research 66

11 ⑵Village banks are faced with worse rural credit environment, less deposits, higher operating costs and competition pressure compared with other related banks. While the village banks follow the manage principles of market-oriented with higher commercialization and competition, and do not undertake the business from national policy. Because of the advantage of compact structure, the flexible service and simple operation mechanism are conductive for the village banks to grasp the market opportunities. ⑶Presently, the innovation of loan mode is deficient, brand recognition is low and human resources are absent. Nevertheless, the current operating situation is impressive and the prospects are bright. 4.2 Suggestions The establishment of village banks is an important measurement for rural financial reform in one region and to promote the development of local economy. Based on the three aspects of economic operating environment the Dujiangyan village bank is faced with, we find the business strategy remains to be further improved and perfected. ⑴Improve social recognition On the one hand, enhance credibility through setting up the investment and financing platform in rural construction of communal facilities and infrastructure. On the other hand, obtain the trust and support of local residents via creating a neat and structured working environment, improving staff and service quality, increasing support for agriculture and solving the actual financial problems in the agricultural production and life of farmers. ⑵Enhance competitiveness through intermediary business Presently, Agricultural bank of China, The deposit and loan of China Postal Saving Banks and Rural Credit Associations are the dominant financial institutions in rural areas. Village banks should launch various intermediary businesses, such as agricultural insurance, investment, and advisement and financing service for farmers etc., satisfy the real financial demand from farmers, small and medium-size corporations to survive in the fierce competition. ⑶Innovate financial products and service Whether focus on the rural areas is the biggest difference between village banks and other financial institutions. The innovation of financial products and service is a double-edged sword, especially for rural regions where financial is undeveloped, and may suffer greater innovative risks. But this does not mean the innovation is unnecessary. The priority for this innovation must satisfy the requirement of rural markets, develop products and service based on the local economic conditions, and design the credit pattern for each distinct region. ⑷Pay attention to talent introduction and training The talent introduction and training is an important guarantee for sustainable development of village banks. Firstly, college graduates are the basic talent sources and fresh blood for the banks. Secondly, attracting senior management personnel from other commercial banks are efficacious ways to improve managing level and operating quality. Last but not least, professional training, in multi-level and multichannel, is the requisite to ensure staffs can adapt to future business. COPY RIGHT 2013 Institute of Interdisciplinary Business Research 67

12 References: [1] De Young R, Duffy D. The Challenges Facing Community Banks: In Their Own Words[R]. Federal Reserve of Chicago Economic Perspectives 26,2004 [2] TIAN Li, HU Gaidao, WANG Dongfang. Research on the Chinese rural finance problem. Journal of Financial Research. No.3,2004, [3] LIU Jin-hui, TANG Qing-sheng. The main problems and policy recommendations of Chinese village bank. Times Finance.2009,(06),44-46 [4] ZHANG Hui-xian. Analysis of the challenges, opportunities and strategies of village banks. Jiangsu Commercial Forum.2010,(01), [5] PENG Hao, XING Xin. The Problems and Strategies of the Town Bank Development. Journal of Capital university of Economics and Business. 2010,(4),58-62 [6] Ajai Nair and Azeb Fissha. Village banking: The Case of Rural and Community Banks in Ghana. Innovations in Rural and Agriculture Finance. Focus18, Brief7 July2010:12-13,11-12 [7] HOU Xin. Analysis of the external environment for the development of village bank. Business Culture. 2011,(01), [8] HU Lin. Study on the existing problems of Chinese village bank. Times Finance. NO.1,2011,62 [9] KUANG Lei. Research on risk management of village banks in China. Marketing Management Review. NO.06,2011,95 [10] LI Jing-xia. Analysis of problems and countermeasures in the development of village banks in China. Finance & Economy. 2011,(06),77-79 [11] LI Jjia-xun, LI Feng-ju. Analysis on the current situation and problems of village bank. Inquiry into Economic Issues. 2011(3), [12] LV Zhi-ping. Analysis of the current situation and suggestions of village banks development in China. Market Modernization. NO.01,2011,220 [13] WANG Hai-yan, FANG Shou-jun. A study on the county banks exogenous problem and the measures. Guangdong Agricultural Sciences. 2011,(12), [14] XIN Ben-sheng. The development status and prospect of village banks. New Finance. 2011,(05),37-41 [15] ZHAO Le-feng. The sustainable development of the village banks under the transition economy. Cooperative Economy & Science. 2011,(9),70-71 [16] ZHAO Zhi-gang, BA Shu-song. Develop Dilemma and Policy Advice of China s village bank. New Finance. 2011(1),40-44 COPY RIGHT 2013 Institute of Interdisciplinary Business Research 68

13 Attachment: Tables and Figures Table Dujiangyan rural financial capacity (million Yuan) Year G K M1 H M2 M3 M4 Rural Financial Gap1( M1= M1-M4) Rural Financial Gap 2( M2=M3- M4) Rural Financial Gap Rate( M2/ M4) % % % % % % % % % % % % COPY RIGHT 2013 Institute of Interdisciplinary Business Research 69

14 Figure the Gross Regional Product (GRP) and Gross Output Value of Agriculture, Forestry, Animal Husbandry and Fishery (GOVAFAF) of Dujiangyan Figure Annual per Capita Net Income of Rural Households (APCNIRH) and Annual Per Capita Disposable Income of Urban Households (APCDIUH) of Chengdu COPY RIGHT 2013 Institute of Interdisciplinary Business Research 70

15 Figure Rural Financial Gap Rate in Dujiangyan City Figure4. The Banking Organization Structure COPY RIGHT 2013 Institute of Interdisciplinary Business Research 71

16 (Million Yuan) Figure5. The Deposit of Jindu Village bank and Lager Commercial Banks in Dujiangyan City Figure6. The Deposit of Jindu Village bank and Small and medium-size Commercial Banks in Dujiangyan City COPY RIGHT 2013 Institute of Interdisciplinary Business Research 72

17 Figure7. The deposit and loan of China Postal Saving Banks and Jindu Village bank Figure8. The capacity of absorbing deposits of Jindu Village bank COPY RIGHT 2013 Institute of Interdisciplinary Business Research 73