Credit cooperatives face pressure

Rural credit cooperatives, the major financial institutions in rural areas now, are collectively owned and have many limitations. They contain only credit departments and have no departments of risk control and human resources, which are common in commercial banks. They chiefly operate deposits and loans, and attend to settlement and intermediate businesses as well.

There are over 32,000 rural credit cooperatives throughout the country. They used to bear responsibilities of both commercial and policy banks, since the government has been emphasizing the significance of agriculture and assigned many policy tasks to them. Owing to administrative interference, many cooperatives are not well managed and harbor a high ratio of non-performing loans. Statistics from the CBRC indicate that at the end of June 2005, capital adequacy ratio of the country's rural credit cooperatives stood at 5.89 percent and the non-performing loan ratio was 17.54 percent.

During the trial run of village and township banks, rural credit cooperatives may not feel challenged. Since rural credit cooperatives cannot satisfy the financing demand in rural areas, village and township banks currently just serve as a supplement to them. But once village and township banks spread nationwide, rural credit cooperatives will be directly influenced.

Rural credit cooperatives still have advantages of established networks in rural areas and are playing a greater role in supporting agricultural development. However, their capital adequacy ratio is low, plus a large amount of non-performing loans. Eventually, if they compete with village and township banks in terms of flexible mechanisms and a wider range of business, they are likely to lose.

"It will be unavoidable that some poorly managed rural credit cooperatives will go bankrupt," commented China Business Post, which is sponsored by the Ministry of Finance.

Du Xiaoshan holds that besides rural credit cooperatives, private lending will also be influenced. In recent years, private lending has been active. The fact that legal financial institutions cannot meet the capital demand of rural economic development has resulted in the rapid growth of private lending in rural areas. Usually among family members, acquaintances and friends, private lending does not require mortgages or guarantees. This is more simple and convenient than the complicated procedure of getting banks loans. Private lending is hence favored by farmers and small and medium-sized rural enterprises.

A research report by the National Natural Science Foundation shows that in Zhejiang Province, private lending totaled around 140 billion yuan. But, as it lacks government regulation and guidance, private lending tends to interrupt financial order, trigger economic disputes and increase social instability.

"It is quite possible that this capital, once invested in village and township banks, would allow it to be better regulated and help reduce financial instability," Du said.