The central government yesterday proposed unprecedented subsidies to lenders in rural areas in order to unleash growth potential in the country's vast yet underdeveloped countryside.
The sweeteners, aimed at encouraging lending to farmers, came at a time when Beijing was keen to cushion the impact of slumping exports by stoking domestic demand. The authorities introduced subsidies to rural purchases of home appliances and vehicles earlier this year.
Rural lenders and credit co-operatives would receive the funding if their loan books were expanded on a yearly basis, had a loan-deposit ratio of at least 50 per cent and met other requirements set by the banking regulator, the Ministry of Finance said.
The subsidies would be equivalent to 2 per cent of the combined average of the outstanding loans at the end of each quarter and were paid by the end of the year, it said.
Lenders in urban areas could also receive the funding if the agricultural loan portfolio grew 15 per cent while the non-performing loan ratio did not increase, the ministry said.
'This is a significant step towards an eventual thawing of the rural credit market,' said He Fuqiang, an executive of Beijing-based ZHY Money & Bond Market Investment Centre, which owns stakes in two rural lending firms.
'It would boost the risk appetite of rural financial operations and thus help bring down the borrowing cost in the countryside.'
The countryside has been struggling to obtain capital since an industry revamp in the late 1990s forced most state banks to retreat, leaving behind only Agricultural Bank of China and rural credit co-operatives at one stage.
Lenders that stayed on have limited lendings on concerns about bad debts and low profits. They also charge rates as high as four times the central bank's benchmark rates.
According to official statistics, rural credit co-operatives have piled up a total of 590 billion yuan (HK$670.18 billion) in non-performing loans by the end of last year.
Beijing began pushing the development of the rural credit market in 2006, including easing capital requirements for the big state-owned banks to set up operations and offering private and foreign investors more leeway than in urban areas.
As a result, 108 rural financial institutions have been set up by the end of January, including branches of foreign lenders such as Citigroup, HSBC Holdings and Standard Chartered.
'The government has for a long time subsidised lending in rural areas through such favourable policies as interest discounts,' said Cao Ge, a consultant to Hainan Provincial Agricultural Credit Co-operative Union.
'But never before has it introduced direct cash subsidies. This is quite a dramatic move.'
By the end of last year, rural credit co-operatives had bad loans of, in yuan: yuan 590b