Rural Finance in China: Opportunities and Challenges

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1 Rural Finance in China: Opportunities and Challenges Jinchang Lai Principal Operations Officer & Lead for Financial Infrastructure East Asia and Pacific Advisory Services CICA Annual Meeting, Hong Kong, November 16, 2012

2 Contents Rural Finance Environment Key Players and Current Reach Opportunities and Challenges IFC Roles and Contributions

3 Rural Finance Environment Urbanization rate has just exceeded 50% in China There are still over 650 million rural residents, about 210 million households 250 million migrant workers from rural areas Practically all rural farmers are small holders Support services and policies: Increasing investment in rural infrastructure A government-run agriculture extension system Some pilots of rural insurance Preferential tax treatments, some fiscal rewards, central bank refinancing, and differentiated monetary policies

4 Rural Finance Environment Rural area = County + Commune/Township + Village Who are the financial services clients? Rural households Rural SMEs (e.g., specialized cooperatives) Agri-business enterprises Rural public entities No possibility for land collateral, with a few exceptions

5 Key Players and Current Reach China s Rural Finance Players (RMB Billion; 1 USD = 6.3 RMB) Players Number (end-2011, or latest) Total Assets (end-2011, or latest) % of Total Banking Assets Rural Credit Cooperatives % 6.36% Rural Commercial Banks % 3.75% Rural Cooperative Banks % 1.24% PSBC % 3.75% ADBC % 1.73% Village and Township Banks % Others Note: Others include micro-credit companies (MCCs), credit guarantee companies (CGCs) and microfinance NGOs. Source: CBRC Annual Reports; company websites; author estimates.

6 Players Rural Credit Cooperatives (RCCs) Rural Commercial Banks (RCBs) Rural Cooperative Banks (RCBs) Postal Savings Bank of China (PSBC) Agricultural Development Bank of China (ADBC) Key Players and Current Reach Roles of Different Players Deposit- Taking Yes Yes Yes Yes N.A. Background Created in 2006 from the Postal Savings System. Set up as one of the three policy banks in Village and Township Banks (VTBs) Yes VTBs have been set up under a CBRC pilot initiated in Others No Microfinance NGOs and CGCs started in 1990s. MCCs have been set up under a PBOC pilot Note: Others include MCCs, CGCs and microfinance NGOs. RCC system was created in The # of entities drastically reduced from some 35,000 to the present # over the past 8 yrs, through consolidations. initiated in Roles The RCC system has outlets, which provides 77.4% of all rural household loans in The sub-sector is still under reform and consolidation. The network has outlets, 70% of which in rural areas. Its micro & small loans reached over 10 million borrowers cumulatively. Provides procurement finance for over half of traded grains and cotton outputs. Have expanded to agri-biz and rural infrastructure financing. Supposed to be microfinance banks. Non-deposit-taking lenders.

7 Key Players and Current Reach The above summary excludes the financial institutions which have some rural/agri. biz lines, principally the Agricultural Bank of China (ABC): Total Assets: RMB billion (end-2011) Branches typically down to County level only, but access points were set up in some villages Outstanding loans related to rural/agri was RMB 1920 billion at end-june million rural banking cards issued Only a small percentage of MCCs and CGCs focus primarily on rural markets; some are performing quite well

8 Key Players and Current Reach Rural areas are generally under-served by financial services: Measuring China s financial inclusion (% of adults): 7% borrowed a new loan in the past year, 8% have a credit card, and 5% have an outstanding mortgage (The Global Findex Database, World Bank) China has over 280 million people with a credit history; only some 120 million are active borrowers. Among which, how many active rural borrowers? Still have 1696 townships/communes without any financial services outlets at the end of Outstanding loans to rural households is around 5% of total outstanding loans in the country. Rural residents also need payments, remittance, insurance, financial planning, and investment services, etc., not just savings and credit

9 Key Players and Current Reach Example: A Branch of RCC

10 Opportunities and Challenges Chinese rural economy is transforming Broader and deeper financial services are imperative: Top priority to narrow the gap between urban and rural living standards As urbanization progresses further, farm size will become larger (through various land circulation schemes); and the importance of financing will increase Modern agriculture is needed to feed a country of over 1.34 billion people; and investment and financing would be key ingredients As agri value chains emerge and grow, financial institutions (FIs) can serve as the data aggregator and information clearer for value chain actors

11 Opportunities and Challenges The future rural China should see less but richer households, many small and medium-sized farms, many rural SMEs (aggregators, processors, distributors, storage operators, transporters, etc.), and some large agri-biz companies (integrators). There will be less need for household loans, more need for rural and agri SME loans, and more demand for diversified and comprehensive financial services

12 Opportunities and Challenges How should the financial industry advance with this evolution? Most Chinese financial institutions (FIs) still need to learn microfinance and retail banking best practice Need to learn how to provide credit to rural and agri. SMEs; and, as land collateral is basically not an option, need to develop credit arrangements along value chains using movable assets It is not a sustainable solution to have more rural branches; need to enable the development of efficient non-financial agents Must have better financial infrastructure: to make it easier to take rural movables as the borrowing base; to develop micro and rural credit reporting; to establish personal bankruptcy framework; and to allow non-deposit-taking lenders (NDTLs) to thrive

13 Opportunities and Challenges How China Ranks on the Ease of Getting Credit Source: Doing Business database, The World Bank and IFC.

14 Opportunities and Challenges How to finance these agri SMEs? A duck farm A kiwi farm They are beyond the level that microfinance technologies can cope with

15 Opportunities and Challenges How to finance these rural SMEs? An equipment services provider An animal feed factory

16 Opportunities and Challenges For international players, potential opportunities are: Participate in the reform of RCCs (restricted to qualified banking institutions) Invest in VTBs (restricted to qualified banking institutions) Develop rural and agri leasing Invest in MCCs and non-deposit-taking lending institutions (NDTLs) which focus on the rural market Create technology solutions Explore agri insurance Financing of major agri-biz enterprises and transactions In general, not really a market for large multinational agri-biz firms thus, little opportunities to work with these partners

17 Opportunities and Challenges Significant challenges remain: High entry barriers Non-deposit-taking lenders lack access to funding Understanding of the market is often a problem Cultural and language barriers One key lesson: Need to have a good local management team who can understand the concepts of foreign player

18 IFC Roles and Contributions Urban-rural balanced development is a priority for IFC operations in China Support to the development of financial infrastructure: Secured transactions reform, which enabled the opening and development of a movables lending industry Credit reporting system, including development of credit reporting products for rural, micro and small borrowers Leasing industry development the size of the industry has expanded by about 8 times since 2003 Assist the creation of pilot MCCs and VTBs, and invest in MFIs and rural FIs Advocating and supporting the development of rural financial services agents

19 Thank You! The views and judgments of this presentation are those of the author. The conclusions and judgments contained herein should not be attributed to and do not necessarily reflect the views of IFC, or its management and Board of Directors, or the countries they represent. The author, by means of this document, is not rendering any professional advice or service, and shall not be responsible for any loss sustained by any person who relies on this presentation as a substitute for professional advice or service.