Duoguang Bei: Rural Commercial Banks Seems to Have Reached a Crossroads

In recent economic growth, some local rural commercial banks (RCBs) are doing quite well, such as the Zhengjiang Rural Commercial United Bank. Its reform model, preserving the county-level legal person, establishes a two-level legal person system. We also see various provinces undergoing reforms through diverse approaches. What positive or negative impacts will these reformations or transformations bring to the future, regardless of the method adopted?


I would like to put this issue in the bigger picture of national strategies. First of all, China is promoting the strategy of high-quality development of inclusive finance. Secondly, a nationwide drive for digitalization is underway, targeting both urban and rural areas to empower various industries. Thirdly, our strategy focus is transitioning from poverty alleviation to rural revitalization. Our initiative is to reshape the rural landscape within five to ten years. Finally, the 30/60 goals are to be realized in both urban and rural areas. Therefore, in the context of the above national strategies, RCBs are tasked with contributing to these four pivotal goals.


Let’s delve into the specific challenges for RCBs on a daily basis. The first is the impact of downward expansion of major banks; the second is the geographical constraints imposed by the geographical delineation of business; the third is the serious challenge of digital transformation.


Now, let’s see Basel III requirements. Regardless of the size, all banks, large and small, have to comply with Basel III requirements in terms of capital adequacy ratio, liquidity, provisioning ratio, and non-performing loan ratio. For small banks, there is actually very limited room for maneuver. In situations where a small bank encounters issues and seeks to bolster its capital, finding shareholders can prove to be a challenging endeavor.


Next, let’s examine the responsibility of the community, a topic dear to my heart. RCBs, especially county-based RCBs, bear societal obligation rooted in the establishment of the rural credit cooperatives (RCCs) over 70 years ago. In fact, Whether termed as RCCs or RCBs, both entities align with the administrative divisions, implying a quasi-governmental role in fulfilling social functions. The community reliance on local rural commercial banking operations places a premium on commercial sustainability. The challenge lies in balancing profitability with community service; a bank unable to generate profits while shouldering responsibilities faces viability issues. Yet, the inescapable responsibility presents a formidable dilemma.


Another challenge is the “last kilometer” issue. For example, we have so many islands in Zhejiang. From a commercial standpoint, establishing branches on each island may seem unnecessary. In reality, no other banks have set up branches there, except for the Zhejiang Rural Commercial United Bank. Admittedly, some of these outlets operate at a loss, but they effectively address the “last kilometer” problem, aligning with the national mandate that financial services must extend to every individual and household. We all know that financial inclusion must live up to its name and be inclusive. It should be as available as air in the sense that everyone can have it at any time. Now we have made substantial strides in achieving this goal, with the RCB system playing a pivotal role.


Back to the fundamentals. Some counties actually have a very small population and a modest economic aggregate. It seems that such a small area is not adequate to support a county-level RCB with an independent legal person. Some of these counties were historically centered around agriculture, and their attempts to diversify into other industries face greater challenges than anticipated. In other words, the economy size exerts fundamental constraints on the survival of the bank.


Therefore, considering various factors, the overall environment for our RCBs is tough. Given this background, the question arises: it is better to have a bigger bank or a smaller one? With this question in mind, let’s explore international cases to seek valuable insights.


First, in all these countries, small and medium-sized banks at the grass-roots level, especially in the countryside, are set up on the premise that they are not purely commercial; instead that they serve a dual purpose: financial and social. It seems to be the case in all countries.


Second, it is crucial to have specific regulations governing this type of institutions and to clarify its special functions.


Third, we can see that these organizations have retained a modest scale while remaining commercially viable. This is quite inspiring. So, It’s not that small banks are likely to fail; on the contrary, they can survive and thrive. But how? It is worth a deep dive.


Fourth, they should give top priority to the local clients.


Fifth, we need to tap into economies of scale. All these small institutions, in fact, are part of a system, be it a provincial rural cooperative bank system, a savings bank system, or a cooperative bank system. These systems, to a large extent, make up for some of the weaknesses of the individual small banks, and can generate economies of scale.


If we summarize these experiences, you will find that there are some common or similar success stories across the globe that we should take some serious thinking.


In my opinion, for RCB to be successful, it should include the following basic elements.


1.    Corporate governance is core.


2.    Clarifying its functions.


3.    Improving the overall internal and external environment, including laws and regulations, infrastructure, and policy orientation.


4.    Improving the management capacity of the organization. Financial inclusion can not rely on sentiment alone, it is very technical. The micro-credit technology that the executive directors and the experts of the Inclusion Club have been talking about so much is the silver bullet that has transformed small banks. Yes, management and technology matter a lot.


5.    Improving competitiveness by learning from others’ strengths.


Later, experts will further discuss these issues. Lastly, let me raise this question to our experts in the first row here: for RCBs, is it the bigger the better or the smaller the better? Can scale help achieve the dual goal? I’ll leave these questions to the experts, thank you!