More ATMS in Farm Country

By LAN XINZHEN

More ATMS in Farm Country

By LAN XINZHEN

As competition in China intensifies, foreign-funded banks and joint ventures look to rural areas to expand operations

With recruitment and personnel training in full swing, BOC Fullerton Community Bank is preparing to open more community banks in Shandong Province’s four counties—Caoxian, Yishui, Linyi and Qingzhou. The move is part of the bank’s overall expansion plan in China’s rural areas,following the opening of its first rural community bank in Qichun, Hubei Province.

BOC Fullerton Community Bank, a joint venture between Temasek Holdings from Singapore and Bank of China, is a national bank providing financial services to small and medium-sized enterprises (SMEs),micro-enterprises, individual clients and rural families in China. Temasek Holdings’involvement stems from its intent to set up 400 community banks in China’s rural areas in the next fi ve years. With one community bank set up in each county, a possibility for the bank, Temasek would be able to cover one fi fth of all county regions in China.

Temasek isn’t the first foreign bank to venture into China’s vast countryside.According to the China Banking Regulatory Commission (CBRC), by the end of 2010,China had registered 349 rural community banks, with more than 40, or 10 percent of the total, opened by foreign-funded banks. Of these banks, the Hong Kong and Shanghai Banking Corp. Ltd. (HSBC) had the most community banks at 16. Citibank also has a presence, entering rural areas as a lending company with three banks in Hubei and Liaoning provinces.

The trend is apparent: Expansion efforts into China’s rural areas indicate a strong interest on the part of foreign-funded banks in the rural fi nancial market.

Low access threshold

To deal with low coverage rate, inadequate financial supplies and competition fl aws in the rural banking sector, the CBRC proposed the establishment of community banks at the end of 2006. As one of the new type rural financial institutions, community banks target clients in counties and townships lacking a variety of banking options.

The investment threshold for opening a rural bank is relatively low, said the CBRC.The minimum registered capital required for setting up a bank in a county town is 3 million yuan ($458,716) and that for opening a community bank in a township is just 1 million yuan ($152,905). For opening a smallloan company in a village, only 100,000 yuan ($15,291) is required as the minimum registered capital.

Business for rural community banks is less restrained than it is for other commercial banks. Community banks can offer various kinds of banking services, and their operations are also simpler compared to big city institutions. Senior managerial personnel are exempt from administrative competency appraisals and only need to pass a uniform fi nancial quali fi cation examination.

Strict policies were issued concerning capital use by the banks. The interim provisions on community banks issued by the Chinese Government say that after setting aide the required reserves, community banks should use all available funds for local economic development. Loans should be granted to meet the demands of rural families, agriculture and economic development of each bank’s respective county. If local demand is satisfied, the banks can invest their surplus funds in local industries,or use the money for purchasing agriculturerelated bonds or financing in other financial institutions.

Foreign funded

On December 13, 2007, the fi rst foreignfunded community bank, Hubei Suizhou Cengdu HSBC Rural Bank Co. Ltd., was opened in Sanligang Township in Suizhou,Hubei Province. The bank offers comprehensive rural fi nancial services to rural families and rural enterprises in Sanligang Township and nearby communities.

Guo Tianyong, a professor at the School of Finance of the Central University of Financeand Economics, says foreign-funded banks have been expanding quickly on the Chinese market. They have participated in various rural fi nancing experiments, and the Chinese regulatory authority hopes these banks will breathe new life into the rural fi nancial market. To help them on, it has offered the banks a series of policy support measures.

(Left) BORROWING NEAR HOME: Beijing Miyun HSBC Rural Bank Co. Ltd. opens on February 12, 2009. HSBC is the first international bank to enter China’s rural financial market and its community banks cover east, central, west and north China

Guo says that by providing fi nancial assistance to small and medium-sized enterprises in rural areas, these businesses will in turn be able to provide services and job opportunities for each bank’s client base.

Industrial insiders say the CBRC will soon allow other financial institutions other than banks to be the biggest shareholder or the sole shareholder of community banks, which means that all foreign investors, including American International Group, Inc., the world’s biggest insurance company, will be able to compete in China’s rural fi nancial market.

To prevent losses, foreign-funded banks will have to be prudent in choosing regions to set up community banks. HSBC prefers regions adjacent to economic development zones. For example, the Hubei Suizhou Cengdu HSBC Rural Bank Co. Ltd. is near the Hubei Suizhou Economic Development Zone. Standard Chartered Bank prefers regions for convenience of enterprises and set up its Inner Mongolia Helingeer Standard Chartered Village Bank adjacent to the famous dairy giant Mengniu.

Big gaps

Rural credit cooperatives are the primary financial institutions in China’s rural areas,implementing both commercial and policy functions. Since the government stresses agricultural reform and production, it presses many non-business tasks, regardless of profits, on the rural credit cooperatives.Moreover, since rural credit cooperatives only have credit operations but no riskcontrol and human resources divisions like ordinary commercial banks, many rural credit cooperatives face poor management and high ratios of non-performing loans.Capital fund restrictions on China’s 32,000 rural credit cooperatives also make it dif fi cult for them to satisfy rural fi nancing demands.

According to the general arrangement of modern rural financial institutions in 2009-11 formulated by the CBRC, 1,294 new rural fi nancial institutions are planned all over the country from 2009 to 2011, of which 1,027 are community banks. The number of community banks opened now is far behind the target of the CBRC.

Major Chinese commercial banks, restricted by their own mechanisms, have been slow to establish community banks. Thus far, China Construction Bank has set up nine community banks, Agricultural Bank of China has four, Industrial and Commercial Bank of China has two and Bank of Communications has three. This suggests there’s ample opportunity for foreign-funded banks to enter the community bank market.

“At present China’s rural financing is weak and market gaps are prevalent. By entering the rural market in good time, foreign banks will gain the initiative,” Guo said.

China has more than 700 million farmers.With accelerated urbanization process, many of them and rural businesses are seeking fi nancial services. Since China is vigorously supporting the rural fi nancial market, there is potential for community banks to develop and fl ourish.

BOC Fullerton Community Bank has seen these prospects. Its services are specially designed for small enterprises, individual clients and rural families. Single loan ranges from 5,000 yuan ($764.53) to 10 million yuan ($1.53 million), among other options in smaller amounts.

RURAL MARKET POTENTIAL: A clerkof the Hubei Suizhou Cengdu HSBC Rural Bank Co. Ltd. consults with a client

Opportunities ahead

“Foreign-funded banks looking to set up community banks see this as an opportunity to get a license and develop long-term investment targets,” Guo said.

Petty loans for rural families will not lead to large amounts of non-performing loans.Since the expansion speed of community banks established by foreign-funded banks is much slower than that of the overall assets of foreign-funded banks on the Chinese mainland, community banks will not have significant influence on their mother companies in terms of profits and loan quality during the first few years after community banks are established.

Business operation of community banks won’t be a worry to the bankers. Information from HSBC shows that Hubei Suizhou Cengdu HSBC Rural Bank Co. Ltd. has already realized balanced income and expenditure. Among the 16 HSBC community banks, the earliest established three have realized balanced incomes and expenditures.This indicates that with big market demand,bankers won’t need to worry about losses to open community banks in China.

The key now is to be one of the fi rst banks to establish a foothold, since the fi rst one to enter the market and establish a network will win out overall among future competitors.

But, foreign-funded banks have further consideration when expanding in China’s rural areas. “In one or two decades, the present village or county may become a city, and the present community bank may be upgraded to a branch of the commercial bank in the future,” said Peter Wong Tung-shun, CEO of the HSBC, Asia-Paci fi c.

An insider from Temasek Holdings toldFinancial Timestoday’s village may be tomorrow’s city, and a prosperous city at that.Wealth is also spreading from cities to the countryside, reducing the dangers for community banks and increasing the land value for those banks.