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 (LUO XIAOGUANG)

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 five years. With one community bank set up in each county, a possibility for the bank, Temasek would be able to cover one fifth 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 financial market.

Low access threshold

To deal with low coverage rate, inadequate financial supplies and competition flaws 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 small-loan 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 financial qualification 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 agriculture-related bonds or financing in other financial institutions.

Foreign funded

On December 13, 2007, the first foreign-funded community bank, Hubei Suizhou Cengdu HSBC Rural Bank Co. Ltd., was opened in Sanligang Township in Suizhou, Hubei Province. The bank offers comprehensive rural financial 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 Finance and Economics, says foreign-funded banks have been expanding quickly on the Chinese market. They have participated in various rural financing experiments, and the Chinese regulatory authority hopes these banks will breathe new life into the rural financial market. To help them on, it has offered the banks a series of policy support measures.

Guo says that by providing financial 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 financial 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.