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Approval of Village and Township Banks in China getting strict

The China Bank Regulatory Commision ( CBRC) recently withdrew the authorization of approval of the openning of Village and Township Banks (VTB). It imples that the development of VTB network will be slowing down, but I think it is smart and timely to do so.

This issues shall be tracked back to 2006, when CBRC issued a policy aiming to foster the rural finance by giving authorizations to local CBRC to approve VTBs. Together with authorization, there are several favourable policies, for instance, the local banks can open VTBs in other regions, and if a VTB is established in poverty driven areas (west areas),  a chain VTB would be allowed to open in the relatively rich areas (east areas).

Because financial service in China has strict control by Gov, many banks, especially small banks were active to apply and open VTBs. With this motivation, many VTBs are newly established, and many of them were in poor areas.

If we only look at the numbers, we may be happy with the figures. The question, however, is how well and how effective these VTBs are working? Do they really meet the needs of farmers, and really devote to provide service to poor farmers?

Soem local banks open VTBs in west areas, but their main business is in the "Chain" of it which locates in rich areas. Some banks established VTBs just because they want to develop their business in other regions. The natinal wide banks, e.g. four big banks only have very limited number of VTBs. It makes sense from one hand, as their business was mainly in urban areas, and their business modaliy does not well fit the rural culture. From the other hand however, VTBs can not benefit from the relatively advanced management which impede its developement as a whole.

The withdraw of the authorization reflects that the authorities are more concerned on the true value of VTBs bringing to poor rural areas. I personally think it is a good approach. In China many things are developing so fast, and the volumn increases in a surpring rate. It sometimes is at the cost of quality though. So I personally t hink China shall slow down, but more focus on green and sustainable development.

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Financial risk, even in limited scale, is a Sword of Damocles over the China banking regulators & supervisors, its effect can be far reaching to this populous and dynamic yet somewhat socially fragile new economy. For banking supervisors, top priority in 2012 is given to curbing systematic financial risk. More restrictive measures maybe forthcoming.
Yet rural financial thirsty is not lessoned, new ways out are ever more anticipated.

Posted on 2/29/12 1:53 AM.

The predicament of the banks interested in opening up new Village and Township Banks (VTBs) would have been of greater interest and concern to IFAD's country programme in China had it been possible for us to profit from their proximity to the grassroots by making sure their products are demanded by the smallholders and the rural poor. The challenges so far encountered with engaging RCCs under many IFAD operations leaves one to wonder if we will ever be able overcome the huddles and link up better with the VTBs instead. Once we can answer that effectively IFAD should probably engage these new players on the landscape to complement the partnerships with RCCs. Therefore, it is prudent for us to keep monitoring developments in the sector for the benefit of the IFAD-China country programme.

Posted on 3/15/12 2:47 PM.

The comments are very insightful indeed.

To really serve the rural people in poverty areas, VTBs have a long way to go, given the challenges they have: shareholders being mainly local urban commercial banks with the aim of business expanding rather than serve rural people, the average capital size in east areas much bigger than western areas, less than half of VTBs profitable, etc.

However, it gives IFAD a potential to build VTBs capacity, improve the management, and better target the consumers, making the VTBs really fill in the gap of financial service in rural poor areas. IFAD programme shall be able to take advantage of VTBs proximity to grassroots and its resources. The average register capital of VTBs are more than 70 million RMB, and many of them exceeds 100 million. Can IFAD's load leverage the financial access for rural poor farmers through guarantee fund for instance?

there must be a big demand for rural finance, and the demand shall be increasing when the economy is growing. Rural finance has been a comparative advantage of Ifad programme and it is interesting to explore more ( partners, products, institutional improvement etc) to accommodate to the dynamics of rural areas.

Posted on 3/21/12 8:43 AM in reply to Sana F. K. Jatta.