The supply of rural finance, cross-regional business of main promoters and the number of outlets of village banks: an empirical analysis based on data collected from 865 village banks in China
(2.Business School of Ningbo University )
【Abstract】From the perspectives of rural financial supply and cross-regional operation of the main promoters in establishing village banks, this article constructs a conceptual framework to explain the difference in the number of outlets of village banks in China and establishes hypotheses. In addition, the study uses the data collected from 865 village banks to test the hypotheses. Since the development orientation and operating scope of village banks are modified by the policy, one single type of the outlets can be observed, which makes the sample unique. The results show that the number of the outlets of village banks is negatively related to the level of rural financial supply in a region, and positively related to the main shareholders’ cross-regional operation decisions and their management capacity. The study concludes with policy recommendations.
【Keywords】 rural financial supply; main promoters; cross-regional business; village banks; outlet;
(Translated by ZHANG Yan)
. ① Broadly, outlets include manned and self-service brick-and-mortar outlets plus extended virtual ones; narrowly, outlets are only manned outlets, including the community sub-branches (convenience stores) and sub-branches for small and micro businesses with some personnel handling consumer consulting and non-cash business in recent years. According to Wang et al. (2010) and this study, the development of self-service and virtual outlets is still in the exploration stage, and village banks only have outlets in the narrow sense. Therefore, in this paper, the number of outlets is the sum of headquarters and all subordinate branches, sub-branches, offices, savings agencies, and convenience stores that set business counters. [^Back]
. ① In 2002, Cisco Systems first used the “branch of the future” to reposition the traditional business outlets as integrating the Internet technology into the financing outlets. The traditional single manual business processing mode should be reformed to render targeted financial services with multiple channels and ways, thus maximizing the customer satisfaction and service efficiency. [^Back]
. ② According to the Some Opinions of CBRC about Adjusting and Relaxing the Policies for Banking Financial Institutions to Enter Rural Areas for Better Supporting the Construction of New Socialist Countryside (No. 90 ), the village banks are built to “solve the problems in rural areas, such as the low coverage of outlets of banking financial institutions, inadequate financial supply and insufficient competition.” [^Back]
. ③ The unified regulations in the orders of No. 3 , No. 4  and No. 3  of CBRC about setting up the branch offices of financial institutions such as village banks apply to the outlet set-up in this paper, but there is no limitation to the number of branch offices in the orders. [^Back]
. ① According to the Interim Provisions on the Administration of Village Banks (No. 5 ), the village bank is established in a county (city) or township (town) to mainly provide financial services to farmers and for the development of agriculture and rural economy; county-based branches are allowed, but granting loans to parties of different places is not allowed. [^Back]
. ② The judgment that input determines output is the basic logic to establish the production function in economics. However, “reason does not always occur before the result.” “A well-known example is that sending a New Year card occurs before the arrival of New Year: the former is not the reason for the latter; on the contrary, the latter is the reason for the former.” (Ji and Zhong, 2009). Hence, this paper holds that the outlet set-up cost hinges on the expected income. [^Back]
. ③ The indirect income includes the economic income implicit in the long-term or global or potential direct income and the political income in the posture response to national policies. [^Back]
. ④ The regulations in the Interim Provisions on the Administration of Village Banks (No. 5  of CBRC) about the location, market orientation, operating business, and regional scope for setting up village banks have determined the given anticipation significance of regional credit demand. [^Back]
. ⑤ Since the issuance of No. 90  of CBRC, opening the rural financial market and increasing the rural financial supply have become the basic policy orientation of rural financial reform in China. [^Back]
. ⑥ According to the order No. 5  of CBRC, if a village bank is to be established in a county (city) or township (town), its registered capital shall not be less than CNY 3 million or CNY 1 million. [^Back]
. ⑦ The main promoter system is the most important innovation in establishing village banks as an independent legal entity and also the primary characteristic of the governance structure of village banks. According to the No. 5  and No. 3  of CBRC, amid the promoters of a village bank, there must be at least one banking financial institution as the largest or sole shareholder (the “main promoter”) with a shareholding ratio of no lower than 15% (20% in the Order No. 5  and the Order No. 27  Implementing Opinions on Encouraging and Guiding the Private Capital to Enter into the Banking Sector reduced it from 20% to 15%), while the shareholding ratio of any individual shareholder or its related party shall not exceed 10%. [^Back]
. ① According to the No. 3  Supplementary Provisions for the Administrative Licensing Items Concerning Small and Medium-Sized Rural Financial Institutions (a supplementary to No. 3  Implementation Measures of the China Banking Regulatory Commission for the Administrative Licensing Items Concerning Small and Medium-Sized Rural Financial Institutions), No. 4  and No. 3  (a revision to No. 3 ), if the main promoter initiates to establish a village bank within the province, its assets and registered capital shall not be lower than CNY 20 billion and CNY 500 million, respectively; if the main promoter initiatives to establish a village bank in another province, its assets and registered capital shall not be lower than CNY 50 billion and CNY 1 billion, respectively. [^Back]
. ② As by the end of 2014, there were 1570 villages and towns without any financial institution. Data source: China Rural Finance Service Report (2014) (PBC Rural Financial Services Research Group). [^Back]
. ① The number of village bank outlets is affected by the outlets’ capacity to supply financial products or services, but the enterprise theory of Ronald H. Coase argues that the outlet is interpreted as the product of saving market trading cost. This hypothesis was proposed within the operating scope of village banks with similar rural financial market trading cost. [^Back]
. ② Rural cooperative financial institutions include the rural credit cooperative, rural commercial bank and rural cooperative bank. [^Back]
. ③ In No. 81  Notice of the CBRC on Adjusting Matters Relating to the Approval of the Formation of Village Banks, based on the order of “west before east; underdeveloped counties before developed counties” and scientific development model featuring “west helped by east,” “rural areas driven by urban areas” and “linking provinces,” we should give priority to the areas where the rural financial supply is not adequate and set up scale and batched village banks according to the principle of intensive development and proper geographical concentration. In addition, No. 46  Opinions of CBRC on Strengthening the Supervision over Village and Township Banks, No. 72  2009–2011 Overall Work Arrangement for New Rural Financial Institutions, No. 158  Notice of CBRC on Related Matters of Setting up Village Banks by the Banking Financial Institutions have also proposed a series of encouraging and supporting policies. [^Back]
. ① Though No. 143  Adjusting Opinions on Market Access Policy for Branch Offices of Small and Medium-Sized Commercial Banks (Trial) loosed some limitations on the cross-regional operation of small and medium-sized commercial banks, but soon tightened due to such financial risk cases as bills of Qilu Bank. [^Back]
. ② Please see the details in the Implementation Measures of the CBRC for the Administrative Licensing Items Concerning Small and Medium-Sized Rural Financial Institutions (No. 3 ) (revised in 2014 and 2015 as No. 4  and No. 3 ) and No. 3  Supplementary Provisions for the Administrative Licensing Items Concerning Small and Medium-Sized Rural Financial Institutions (a supplementary to No. 3  Implementation Measures of the China Banking Regulatory Commission for the Administrative Licensing Items Concerning Small and Medium-Sized Rural Financial Institutions). [^Back]
. ③ As by the end of 2014, 144 city commercial banks have established over 130 branch offices outside provinces (Ren, Z. Huabei Finance (华北金融), (4) (2014)). [^Back]
. ① The data released on the press conference themed “the 10th Anniversary for Cultivating Development of Village Banks” by CBRC on March 2, 2017 indicates that, as by the end of 2016, there were 1519 village banks, with a total amount of assets of CNY 1.2377 trillion and the balance of loans of CNY 702.1 billion, including CNY 652.1 billion to rural households and small and micro businesses, around 93%; these village banks are located in 1213 counties (cities and municipalities) with a coverage rate of 67%, ten of which are 100% (http://www.licai18.com/article/ArticleDetail.jsp?docId=2257266). [^Back]
. ② See No. 15  Experimental Plan for Deepening the Reform of Rural Credit Cooperatives and No. 129  Outline of Monitoring and Development of City Commercial Banks for details. The founding of Bank of Shanghai, Ningbo Branch in April 2006 has been considered as the symbol of cross-regional operation of city commercial banks in China. [^Back]
. ① No. 4  Implementation Measures of the CBRC for the Administrative Licensing Items Concerning Small and Medium-Sized Rural Financial Institutions (Revised) adjusted the minimum opening period for a village bank to set up sub-branches from two years to six months. [^Back]
. ② People’s Bank of China (compiled): Report on Regional Finance Development (calendar years), the website of People’s Bank of China (www.pbc.gov.cn). [^Back]
. ③ National Bureau of Statistics (compiled): China Statistical Yearbook (2007–2014, calendar years). Beijing: China Statistics Press. [^Back]
. ① Joint test results: F value = 0.71, statistically insignificant. [^Back]
. ① Data source: Postal Savings Bank of China. 2014 Social Responsibility Report. Beijing: China Finance Publishing House, (2015). [^Back]
. ① In fact, CBRC has begun supporting the contributors to set up village banks in poor areas. For instance, No. 158  Notice of CBRC on Related Matters of Setting up Village Banks by the Banking Financial Institutions clearly pointed out to give priority to support applicants in setting up village banks in provincially or nationally poor counties in western China. [^Back]
1. Bai, C. Financial Times (金融时报), (2) (2017).
2. Dong, X. Retail Banking (零售银行), (1) (2014).
3. Dong, X., Cheng, C. & Long, L. Finance and Trade Research (财贸研究), (2) (2014).
4. Du, X. 中国村镇银行发展报告2016. Beijing: China Social Sciences Press, (2016).
5. Gao, P. & Wang, X. Journal of Agrotechnical Economics (农业技术经济), (4) (2011).
6. He, G. Rural Credit Cooperative of China (中国农村信用合作), (1) (2008).
7. He, G. China Rural Finance (中国农村金融), (1) (2010).
8. Ji, Y. & Zhong, F. Economic Research Journal (经济研究), (12) (2009).
9. Jiao, L. & Yu, P. Financial Perspectives Journal (金融纵横), (1) (2009).
10. Woodridge, G. M. Introductory Econometrics (4th edition) (计量经济学导论 (第四版)). Beijing: China Renmin University Press, (2014).
11. Li, G. The Journal of World Economy (世界经济), (11) (2014).
12. Liu, X. Journal of Agricultural Bank of China Wuhan Training College (中国农业银行武汉培训学院学报), (5) (2009).
13. Liu, Z. & Mao, Y. Journal of Business Economics (商业经济与管理), (9) (2004).
14. Lu, Z. & Xiong, D. Chinese Rural Economy (中国农村经济), (3) (2015).
15. Tian, S., Xu, M. & Xu, Y. Journal of Financial Research (金融研究), (9) (2008).
16. Wang, G. & Li, K. Journal of Central University of Finance and Economics (中央财经大学学报), (5) (2006).
17. Wang, J. & Hu, G. Finance Forum (金融论坛), (6) (2013).
18. Wang, Q., Wu, W. & Huang, J. Journal of Financial Research (金融研究), (1) (2012).
19. Wang, X., Wen, T. & Wang, D. Economic Science (经济科学), (2) (2014).
20. Wang, X., He, X. & He, J. Issues in Agricultural Economy (农业经济问题), (8) (2010).
21. Xia, X. Financial Theory & Practice (金融理论与实践), (1) (2014).
22. Yang, H. Financial Theory & Practice (金融理论与实践), (7) (2010).
23. Yang, F. China Banking (中国银行业), (4) (2016).
24. Yu, S. Fujian Finance (福建金融), (8) (2007).
25. Zhang, B. & Li, D. Jiangsu Social Sciences (江苏社会科学), (2) (2014).
26. The People’s Bank of China Rural Financial Services Research Group. China Rural Finance Service Report (2014). Beijing: China Financial Publishing House, (2014).
27. Allen, F., and D. Gale, 2000, “Bubbles and Crises”, Economic Journal, (460): 236–255.
28. Baele, L., O. D. Jonghe, and R. V. Vennet, 2007, “Does the Stock Market Value Bank Diversification”, Journal of Banking and Finance, (7): 116–121.
29. Berger, A., and D. Young, 2001, “The Effects of Geographic Expansion on Bank Efficiency”, Journal of Financial Services Research, 19 (2–3): 163–184.
30. Boot, A., and A. Schmeits, 2000, “Market Discipline and Incentive Problems in Conglomerate Firms with Applications to Banking”, Journal of Financial Intermediation, 9 (3): 240–273.
31. Brickley, J. A., J. S. Linck, and C. W. Smith, 2003, “Boundaries of the Firm: Evidence from the Banking Industry”, Journal of Financial Economics, (70): 351–383.
32. Deng, S., and E. Elyasianit, 2008, “Geographic Diversification, Bank Holding Company Value, and Risk”, Journal of Money, Credit and Banking, (40): 1217–1238.
33. Economides, N., 1996, “The Economics of Networks”, International Journal of Industrial Organization, (16): 675–699.
34. Lowellen, W. G. A., 1971, “Pure Financial Rationale for the Conglomerate Merger”, Journal of Finance, (26): 521–537.
35. Mckinnon, R., 1973, Money and Capital in Economic Development, Washington DC: Brookings Institution.