Rural Credit Cooperatives in China

Publication Date: Jun 2005
Published by: PlaNet Finance
Document Type: Paper (Microsoft Word)

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Reforming China’s Rural Credit Co-operatives for microfinance delivery

This paper focuses on China’s Rural Credit Co-operatives (RCCs), a key vehicle identified for microfinance delivery, status of their reforms and importance of a regulatory and supervisory strategy.

It discusses the:

• Failure of four nationalized banks, ten commercial banks and NGOs in China to create microfinance access;
• Problems in RCCs that led to pilot reforms in 2003 to:
  • Clarify ownership structure and strengthen corporate governance,
  • Transfer administrative responsibilities to provincial governments and resolve historic financial burdens.
• Pilot outcomes:
  • Transformation of RCCs into agricultural commercial banks, agricultural co-operative banks and country level consolidated structures,
  • Liquidation of RCCs with serious financial problems,
  • Formation of Provisional RCC Unions,
  • Provision of financial incentives,
  • Liberalization of interest rates.
• Problems in the reform process:
  • Wrong incentive structures due to the Government’s top-down approach,
  • Lack of participation by farmer-owners in restructured RCCs,
  • Lack of progress in interest rate liberalization,
  • Poor corporate governance and human resource development,
  • Continued capital outflow from rural areas,
  • Incomplete supervision and regulatory framework.

The paper states that for efficient supervision and regulation of RCCs, China needs to:

• Draw upon the experiences from other countries,
• Integrate the experiences of last three years of reforms,
• Encourage high participation among key stakeholders at the China Banking Regulatory Commission’s Rural Cooperative Finance department,
• Aim towards an internal working strategy paper for RCC regulation and supervision.