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Banking on rural areas where farmers seek more loans
By Ma Shukun, Zou Huilin and Xiong Congru |
April 27, 2009, Monday
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"SPRING used to be hard for my family. I had to borrow money from relatives to pay for both school for my children and tools and pesticide for my farm," said Uygur farmer Sawut.
But this spring, he got a 10,000 yuan (US$1,470) loan from Standard Chartered bank to pay for tools and pesticide.
Sawut is one of 600 farmers in Awati County in the Xinjiang Uygur Autonomous Region who have gotten loans from a micro-finance program launched by United Kingdom-based Standard Chartered and Hong Kong-based Esquel in December, 2007.
Esquel makes cotton T-shirts, and it buys some of the cotton for its factories from farms in Awati. The program provides small loans, up to 15,000 yuan, to cotton farmers, without collateral or guarantees.
Interest on loans in this program last year averaged 9.9 percent, but it fell to 8 percent this year. The current one-year benchmark loan rate, as set by the People's Bank of China (PBOC), is 5.31 percent.
Programs like this help fill a huge financial vacuum in rural China, where banks are few despite a population of about 800 million farmers who need funding for their crops and families.
At the end of 2007, loans from financial institutions in counties or villages stood at 5.72 trillion yuan, accounting for 22 percent of total loans from banking institutions nationwide.
No collateral
Li Chenggui, an expert on rural economy at the Chinese Academy of Social Sciences, said it was illegal for farmers to use farmland as collateral for loans. Under Chinese law, farmland is collectively owned and can only be used for farming - not collateral.
In relatively developed eastern regions, farmers can use large farm vehicles like tractors and other equipment as collateral, Li said, but it was impossible for farmers in the poor western regions to do that. They could only borrow from relatives or friends.
The average annual per capita income of rural households in China stood at 4,140 yuan, compared with 13,786 yuan in urban areas, at the end of 2007. The per capita figure for households in remote western areas was only 2,908 yuan.
In the late 1990s, major state banks started retreating from rural areas after failing to turn a profit. The state banks instead sought to expand overseas to upgrade their competitiveness.
But tough competition in over-banked cities and signs that rural areas are beginning to present opportunities for profit have led some domestic banks to take a second look at neglected rural regions.
They've also noticed that foreign banks are moving into rural regions. Foreign banks, which provide high-end services in cities, saw an opening in the rural market after the China Banking Regulatory Commission (CBRC) revised regulations covering rural banking facilities in 2006.
One of the CBRC's changes was to reduce the amount of capital needed to establish rural financial facilities.
The changes meant that foreign financial institutions could establish rural banks and loan companies in selected areas.
Early birds
UK-based HSBC was the first to test the waters. Following HSBC, Citigroup and Standard Chartered began to make their way into the hinterlands, establishing rural financial outlets.
After establishing its first micro-finance program in the Xinjiang Uygur Autonomous Region, the one that made the loan to farmer Sawut, Standard Chartered Bank opened its first village bank in the Inner Mongolia Autonomous Region in February this year.
HSBC said rural banks would not contribute to profits in the beginning, but the bank might be profitable in three years.
Standard Chartered said its first micro-finance program in Xinjiang had provided loans at floating interest rates for more than 600 cotton farmers within a year. The loans had been repaid by the end of 2008.
China's exports have fallen, factories have shut in large numbers, and millions of unemployed migrant workers have had to go back to their rural homes as the global economic crisis deepens. These developments have pushed China to raise rural incomes and boost rural consumption.
(The authors are writers at Xinhua new agency.)
But this spring, he got a 10,000 yuan (US$1,470) loan from Standard Chartered bank to pay for tools and pesticide.
Sawut is one of 600 farmers in Awati County in the Xinjiang Uygur Autonomous Region who have gotten loans from a micro-finance program launched by United Kingdom-based Standard Chartered and Hong Kong-based Esquel in December, 2007.
Esquel makes cotton T-shirts, and it buys some of the cotton for its factories from farms in Awati. The program provides small loans, up to 15,000 yuan, to cotton farmers, without collateral or guarantees.
Interest on loans in this program last year averaged 9.9 percent, but it fell to 8 percent this year. The current one-year benchmark loan rate, as set by the People's Bank of China (PBOC), is 5.31 percent.
Programs like this help fill a huge financial vacuum in rural China, where banks are few despite a population of about 800 million farmers who need funding for their crops and families.
At the end of 2007, loans from financial institutions in counties or villages stood at 5.72 trillion yuan, accounting for 22 percent of total loans from banking institutions nationwide.
No collateral
Li Chenggui, an expert on rural economy at the Chinese Academy of Social Sciences, said it was illegal for farmers to use farmland as collateral for loans. Under Chinese law, farmland is collectively owned and can only be used for farming - not collateral.
In relatively developed eastern regions, farmers can use large farm vehicles like tractors and other equipment as collateral, Li said, but it was impossible for farmers in the poor western regions to do that. They could only borrow from relatives or friends.
The average annual per capita income of rural households in China stood at 4,140 yuan, compared with 13,786 yuan in urban areas, at the end of 2007. The per capita figure for households in remote western areas was only 2,908 yuan.
In the late 1990s, major state banks started retreating from rural areas after failing to turn a profit. The state banks instead sought to expand overseas to upgrade their competitiveness.
But tough competition in over-banked cities and signs that rural areas are beginning to present opportunities for profit have led some domestic banks to take a second look at neglected rural regions.
They've also noticed that foreign banks are moving into rural regions. Foreign banks, which provide high-end services in cities, saw an opening in the rural market after the China Banking Regulatory Commission (CBRC) revised regulations covering rural banking facilities in 2006.
One of the CBRC's changes was to reduce the amount of capital needed to establish rural financial facilities.
The changes meant that foreign financial institutions could establish rural banks and loan companies in selected areas.
Early birds
UK-based HSBC was the first to test the waters. Following HSBC, Citigroup and Standard Chartered began to make their way into the hinterlands, establishing rural financial outlets.
After establishing its first micro-finance program in the Xinjiang Uygur Autonomous Region, the one that made the loan to farmer Sawut, Standard Chartered Bank opened its first village bank in the Inner Mongolia Autonomous Region in February this year.
HSBC said rural banks would not contribute to profits in the beginning, but the bank might be profitable in three years.
Standard Chartered said its first micro-finance program in Xinjiang had provided loans at floating interest rates for more than 600 cotton farmers within a year. The loans had been repaid by the end of 2008.
China's exports have fallen, factories have shut in large numbers, and millions of unemployed migrant workers have had to go back to their rural homes as the global economic crisis deepens. These developments have pushed China to raise rural incomes and boost rural consumption.
(The authors are writers at Xinhua new agency.)
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