(Yicai) July 11 -- The number of Chinese rural banks that have merged with each other or been absorbed into bigger lenders since the beginning of the year is already four times that of the whole of last year as the structural reorganization of the country’s small lenders gains pace to mitigate risk. 

Almost 40 such micro lenders, have been merged or absorbed so far this year, with most of the takeovers by either rural commercial banks, urban commercial lenders or joint-stock banks, according to Yicai research. Last year just 10 were shut down.

And the structural reorganization of rural banks will accelerate which means their number will continue to reduce, according to market insiders.

The slowdown in macroeconomic growth since 2020 has meant that the difficulties faced by multiple market entities in China’s rural areas have gradually spread to small banks in the locality, putting great pressure on their asset quality, market insiders told Yicai.

On top of this, the registered capital and minimum shareholding ratios of rural banks are generally lower than normal regulatory criteria, an insider at a rural bank based in eastern China told Yicai. This has directly resulted in rural banks having relatively weak capital strengths and a smaller asset size, which are not enough to support their own development and make it harder to control costs and risks.

For instance, the cumulative registered capital of 25 rural banks, whose current majority shareholder is Guangzhou Rural Commercial Bank, comes to CNY3.3 billion (USD456.9 million), or just CNY133 million (USD18.3 million) on average per bank.

Rural banks also find it hard to attract deposits, as their corporate credibility is generally weaker than the local branches of competitors such as large state-owned banks, rural credit unions and rural commercial banks, an insider at a rural bank in eastern Zhejiang province told Yicai. The interest rates on loans offered by rural banks also cannot compete with those by medium-sized and large banks, he added.

Flaws in corporate governance also adversely impact their business development. Due to their smaller size, rural banks’ corporate governance structures are usually not well developed, analysts said. For example, sometimes the chairpersons also serve as the presidents, and there are looser requirements for the appointment of directors and senior executives, which increases the risk of violations in internal controls.

“There are essentially only two ways to enhance the quality of rural banks, which are the replenishment of capital and the improvement of asset quality,” an insider at a Shanghai-based urban bank said. Being absorbed into urban and rural commercial banks as well as joint-stock lenders or even merging with each other will help rural banks to defend against risks better.

Turning rural banks into the branches of small and medium-sized local banks is an easy and effective way to mitigate risks, said finance expert Zhou Yiqin. This is because the two entities have a similar corporate culture and management models, so the integration of their businesses takes less time. And if those initiating the mergers did not previously have branches where the rural banks are located, the merger will help them expand their business scope too.

Editors: Tang Shihua, Kim Taylor