Transcript Restructuring China’s Rural Credit Cooperatives: Lessons Learned Wang Jun, Senior Financial Sector Specialist

Restructuring China’s Rural
Credit Cooperatives:
Lessons Learned
Wang Jun, Senior Financial Sector Specialist
EAP Region, the World Bank
December 5, 2005
Main points of the presentation
What led to the
reform pilot in
2003
Main features
of the reform
pilot
Lessons
learned
• A brief history of the RCCs
• Recent attempts at restructuring the RCCs
• Objectives and options
• Objectives
• Financial restructuring
• Diversity in organization formats
• Incentives
• Financial restructuring should be
accompanied with operations restructuring
• Role of government
• Role of foreign and private investors
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Main players in China’s rural financial market
How the RCCs became a virtual
monopoly in rural finance
Agricultural
Bank of China
Established as a specialized agricultural
bank, but a became commercialized
state-owned bank and withdrew from
the countryside after 1998
Agricultural
Development
Bank of China
Established in 1994 with the objective to
take over policy lending from the ABC,
and became a funding vehicle for
procurement of grain, cotton and
edible oil.
Postal
Savings and
Remittances
A deposit-only financial institution that
has been regarded as a capital
sucking machine on the rural financial
market, with about 80% of its over one
trillion deposits taken from the
countryside.
The RCCs
over time have
become the
only
comprehensive
FI in the rural
financial
market
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But the RCCs were subject to conflicting mandates
Social objectives
Commercial objectives
• Support agricultural
• To become commercially
production
• Poverty reduction
• Rural financial stability
• Support the rural
economy
• Support various policy
initiatives by the local
government
sustainable over time
• To be transformed into
commercial entities with all
forms of corporate
governance in modern
financial institutions
• To introduce commercial
managerial systems and
controls by mimicking
commercial banks
The conflicting
mandates only
aggravate
moral hazard
prevalent in the
RCCs
3
The RCCs were subject to stakeholders with conflicting
objectives
The government
•Central
•Local
The
regulatory
authorities
•CBRC
•PBC
RCCs
The market:
•ABC
•PSRB
•Money
lenders
The owners/clients:
•Members
•customers
And they were no different than state-owned banks in the rural financial market
4
Main objectives of the RCC reform pilot
A three-pronged approach to
restructuring the RCCs
Improve
corporate
governance
• Ownership transformation
• Create all forms of corporate
governance
No one-sizefits-all
approach
• Consolidate ownership at the county
Align
incentives of
stakeholders
• Hand over managerial responsibilities
level
• Rural commercial banks
• Rural cooperative banks
• RCC union at the provincial level
To improve
service
functions of the
RCCs in the
rural financial
market
to the provincial government
• Allow the CBRC to concentrate on
regulation and supervision of RFIs
• Fund historical losses through
monetization and fiscal support
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The RCCs were given two options to compensate historical
losses
A re-lending facility
Special CB notes
• Local governments borrow from the
• A special note with two-year maturity,
PBC to cover 50% of the historical
losses with cut-off date of December
31, 2002
• Maturity ranges from 3 to 5 to 8 years
depending on circumstances of the
RCCs
• Interest rates charged were half of the
that for required reserve
• And insolvency data were calculated
according to a formula set by the PBC,
which specified loss ratios to each
category of loan classification
issued by the PBC to reforming RCCs
in exchange of NPLs
• The special notes were not tradable,
endorsable and could not be used as
collateral
• But could be redeemed ahead of
maturity with conditions attached
• Redemption of the special notes were
conditioned upon improvements in RCC
reforms, and would be verified based
on performances of individual RCCs
• Criteria for redemption include:
ownership transformation; corporate
governance; capital adequacy; NPL
ratio, etc.
In the end almost all provinces opted for the special notes
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Capital adequacy of the 8 provinces before and after financial
restructuring, 2002-04, in percent
20
Jilin
10
Jiangsu
0
-10
Jiangxi
-20
Shannxi
-30
Zhejiang
-40
Shangdong
-50
Chongqing
-60
Guizhou
2002
2003
2004
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Aggregate capital of RCCs in the 8 provinces participating in the pilot
Capital Adequacy Ratio
Unit: %
Net Capital
Unit: RMB100 Million
Netw orth of Capital
10
8
6
4
2
0
-2
-4
-6
-8
-10
700
600
500
400
300
200
100
0
2002
2003
2004
-100
2002
2003
2004
The aggregate negative capital of
all RCCs stood at 122.74 billion at
end 2002.
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Portfolio quality of RCCs appeared to have improved in the 8 pilot
provinces, but did they really?
Non-performing loans
Unit: RMB 100 million
Non-performing loans
In percent
30
1400
25
1200
20
1000
800
15
600
10
400
5
200
0
0
2002
2003
2004
Sept. 2005
The aggregate NPLs stood at 505.9
billion yuan at end 2002
2002
2003
2004
Sept. 2005
And the average NPL ratio of all
RCCs combined ws 37% at end
2002
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Looks can be deceptive: are the RCCs really making money?
Profitability of RCCs in the 8 provinces
Unit: RMB100 Million
80
70
60
50
40
30
20
10
0
2002
2003
2004
Sept.
2005
10
Volume of loan growth maybe, but hard to tell if agricultural lending also
grew
Outstanding Loans
Unit: RMB100 Million
Outstanding Agricultural Loans
Unit: RMB100 Million
9000
4500
8000
4000
7000
3500
6000
3000
5000
2500
4000
2000
3000
1500
2000
1000
1000
500
0
0
2002
2003
2004
Sept. 2005
2002
2003
2004
Sept. 2005
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The RCC reform pilot was given little time for
experimentation
July 2003
8 provinces participated in the
pilot
• Jilin
• Jiangsu
• Jiangxi
• Shandong
• Shanxi
• Guizhou
• Zhejiang
• Chongqing
August 2004
21 other provinces were brought
in, with the exception of:
• Hainan which opted not to
participate in the pilot
• Tibet where there are no rural
credit cooperatives
The hastiness in pushing the pilot, slightly one year into it, to the rest
of the country seriously damaged credibility of the pilot scheme.
12
Examples of perverse incentives
The option to set up provincial RCCU
The option for PBC special notes
• All provinces chose to set up a RCC
• All provinces chose the PBC special
union at the provincial level, and
personnel appointment became an
obsession
• All eligible RCCs “chose” to be
converted to Rural Cooperative Banks
notes as the funding option, given the
apparent financial advantages
• In order to meet the requirements for
redemption, local government offered
guaranteed dividends payment to new
shareholders
• Some bank regulators ended up being
owners of RCCs under their regulation
and supervision, especially in localities
where new equity was hard to mobilize
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The role of government remains dubious
Under the central government
The option for PBC special notes
• First the PBC, later the CBRC, served
• The provincial government assumed
as both owner and regulator
• RCC managers were appointed by the
government agencies at various levels
• The CBRC is supposed to limit its role
to regulation and supervision
• The government protected the RCCs
from market competition
• The government officials driving the
RCC reform pilot got promoted or
reassigned elsewhere, casting
uncertainty over the future of RCC
reform
managerial power and run the RCCs
through the provincial RCC Union
• RCC managers now appointed by the
RCC Union representing the provincial
government
• The “fit and proper test” by the CBRC
sometimes become overbearing
• The government continues to protect
the RCCs from market competition
through entry and exit policies
The central bank is preparing another pilot to introduce credit-only
commercial microfinance institutions in 5 provinces, with the objective to
increase competition in the rural financial market while bringing in
commercially sustainable microfinance to improve access to finance
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The role of foreign and private investors in RFIs
•Limited experiment in equity participation by foreign and
private financial institutions in the emerging RFIs
–IFC and Rabobank in Hangzhou RCCU
–IFC and Rabobank in Tianjin Rural Cooperative Bank
• Equity participation in the PBC sanctioned credit-only MFIs
in selected provinces, which could serve to break the
monopoly of RCCs in those localities
• Other experiments
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