The Research On Impact Mechanism Of Financial Market Competition And Village Bank Business Performance

The third Plenary Session of the 17th Central Committee of the Communist Party of China states that Rural Finance is the key issue of modern rural economics.The Annual’No.1 Central Document’ stresses that Rural Finance is the most important part for the development of the ’three rural issues:agriculture,rural areas and farmers’ since 2004.To improve the access to financial services in rural areas and solve the ’three rural issues’,the China Banking Regulatory Commission(CBRC)released a policy entitled ’Opinions on widen the market accesses of the banking institutions in the rural district for push forward the constructions of new socialist countryside’(’Opinions’)in 2006,in order to boost vitality of the financial market and form a various,multiple,comprehensive,flexible and effective financial system in rural areas.The ’Opinions’ starts a new round of the reform and development of financial services in rural areas,in terms of encouraging commercial banks to establish branches,constructing village banks,lending company and rural mutual cooperatives.In 2007,the CBRC also released several documents to make sure the construction and review of the village bank in an orderly progress,such as ’Interim Provisions for the Administration of Village Bank’ and ’Instructions for the Construction and Review of the Village Bank’.By the end of 2013,there have been 1071 village banks across 1083 villages all over the country,the total assets of which are 628.9 billion and the total loan are 363.2 billion.The new round of financial reform have been implemented for 8 years,and the rural financial market is more competitive.As the innovative pioneer,how is the development of the village banks and whether they achieve the policy objectives or not?According to’Interim Provisions for the Administration of Village Bank’,the central government sets up village banks for two policy goals:one goal is to achieve sustainable operation.As a commercial instead of a policy-based financial institution,village banks should be able to operate independently,manage risks,makes profit,regulate themselves and make the finance growth sustainable.The other goal is to extend the loan coverage in rural areas.Village banks should offer loans in the principle of’small amount’ and diversity.The loans also need to satisfy the demands of the farmers in the first place,increase agriculture andrural economic growth,and improve the social performance as well.Although government releases policies to support village banks and grants them special subsidies in order to encourage them to help farmers and offer micro-loans in a wide and deep level of coverage,it seems that the policies don’t take effect.Most village banks are capable of gaining profits and sustainable operating,but they still have to adjust their market positioning.Despite the fact that most village banks are in rural areas,some of them still prefer to serve small business and high-quality client,or even never offer loans to agriculture companies.All the above phenomena should be criticized and corrected.As commercial financial institution,village banks are making their strategic and operational objectives based on the principle of profit maximization.Since banks’ business operation autonomy is protected by law,government can only guide them by policies instead of interfering their operational decisions directly by administrative orders.The question is,how to design an efficient market system and regulations in which social performance can become village banks’ rational and spontaneous choice to maximize profits?Asking for a solution of the above question,we need to find out the way that village banks make decisions during their business operation.Which is the influence of financial market competitions on financial and social performance of the village banks?Do financial market competitions and development of village banks improve the farmers’access to banks’ loan?To solve the above issues,theories of industrial economics,information economics,and rural finance are applied in the research of village banks’ business behavior based on the structure-conduct-performance(SCP)paradigm in industrial Organization Economics.This paper logically clarified the impact of the financial market competition on the village banks’ business behavior,fully investigated the influence of financial market competition on the village banks’ financial and social performance,and analyzed the working mechanisms of the market competition to the village banks’ loan behavior from the view of market positioning adjustments and loan innovations respectively.Based on these facts,this paper further discuss the working principle of the improvement on loan access by introducing the financial market competition and developing village banks from the perspective of small and micro businesses on the capital demanding side.The ideas from this paper can theoretically and practically support the objective evaluation of the policy effects on the financial reform in rural areas.At the same time,we propose some policy suggestions on deepening reform and increasing the finance service availability.The main contents and conclusion are summarized as follows:Part 1:The analysis of impact of financial market competitions on the business operation performance of village banks.The key of this round rural finance reform is to figure out the inadequate issue of the financial institution branches and the imperfect competition issue of the financial market in rural areas.By allowing new reform forces to exist funding,It further solves the difficult and costly issues on obtain financing in rural areas.In this part of the article,the total financial supply and the competition degree of the financial market in the sample rural areas are analyzed firstly.It turns out that there are many financial institution branches operating in Jiangsu province and the market is very competitive.However,it has a serious imbalance problem in development of the finance service from area to area in Jiangsu province.This article investigates the dual-performance of village banks under the frame of rural financial institution performance evaluation stated by Prof.Yaron from the World Bank.By taking village banks in Jiangsu province as research samples,we measure the finance and social performance by ROA and Deep indicators,and demonstrate the relationship between the business performance of village banks and the degree of competition of the banking market by unobserved effect panel data model on the basis of theoretical analysis.We demonstrate that:(1)The degree of competition of the banking market has an outstanding negative correlation with the village banks’ finance performance which means the more competitive the banking market is,the poorer finance performance village banks show.As the number of banks increases and the competition intensifies in rural areas,village banks faces the facts such as business cost rising,qualified customs lost which finally lead to worse finance performance.(2)The degree of competition of the banking market has an outstanding positive correlation with the village banks’ social performance which means the more competitive the banking market is,the better social performance village banks exhibit.As the more intensive of the competition in financial market,village banks offer more micro-loans and deepen the loan coverage in the rural area.As a result,the vulnerable group will get more support from bank loans and be able to improve their financial conditions.The social development is facilitated to some extent based on the fact above.Part 2:The analysis of impact of financial market competitions on the business behavior of village banks.Corporate behavior is one of the most important research area of industrial Organization Economics theory,which links to the market structure and corporate performance in structure-conduct-performance(SCP)paradigm.As mentioned above,we have demonstrated the outstanding influence on village banks’ business performance brought by the banking market competition.However,the mechanism of market competition have not been verified.After lowering the threshold of rural financial market access in 2006,the market scale and the number of financial institutions have been increased significantly.The competence among village banks become more and more intensive which would create greater barrier to the new players.Base on the research result of part 1,we combine the competition behavior theory of the financial institution and thoroughly investigate business behavior related to market positioning adjustments and loan innovations of village banks.By taking village banks in Jiangsu province as samples,we present the relationship between the change of village banks’ business behavior and degree of competence of banking industry based on the unobserved effect panel data model.We demonstrate that:(1)The market competition of banking industry has profoundly altered the asset allocation and customer selection of village banks.Nowadays,the rural financial market structure is changing and the competition is intensified.To maximize their profit,village banks will actively adjust their own business behaviors and the market positioning strategies.The competence of financial market change the types of loan customer village banks prefer,which increase the loan scales to farms,rise the percentage of loans given to farms,and lowers ratios of the loans for small and micro businesses.(2)The market competition of banking industry has significantly encouraged village banks to engage in innovative behavior,including innovations in loan products.By increasing the amount of relationship lending,village banks can decrease the amount of transactional lending and reduce the dependence of the collateral which will effects their management and social performance.So they can get differentiation advantage and gain excess profit.It verifies that market competition benefits the resources integration,management as well as techniques of village banks,and further increase their survival probabilities and social performance.Part 3:The analysis of impact of financial market competitions on the accessibility to financial services of SMEs in rural areas.Small and Micro-Enterprises(SMEs)can help labor relocate,increase the income level in rural areas,and accelerate the rural economic growth.Loans from bank is a very important channel for small and micro businesses to get financial support.However,the loan support from financial institutions in bank industry to small and micro businesses is constrained.The fact that obtain financing in rural areas is difficult and costly is widely accepted in academics.By lowering the threshold of rural financial market access,the situation that financial institutions and financial service supply are inadequate is getting better and the rural financial market become more competitive.So is it true that lowering the threshold of financial market access and increasing the competence level of bank industry in rural areas can solve the loan constrains and increase the accessibility to loan services for small and micro businesses?The novel financial institution such as village banks are established to serve the ’three rural issues’.Do they achieve their political goals?This article investigates the loan accessibility of small and micro businesses in rural areas based on the panel data from 45 counties in Jiangsu province during 2009 to 2013.We illustrate the impact of bank industry’s competition degree and development of village banks on the small and micro businesses’ loan accessibility.We demonstrate that:(1)The more competitive the bank industry is,the more micro-loans are provided by commercial banks and it helps small and micro businesses obtain loans in an easier way.Commercial banks’ business behaviors depends on the competition level of the bank industry.Market lack of competition will result in higher cost or less amount of the loan,which will block small and micro businesses access to the loan service.(2)The development of the village banks can increase the competition level of the micro-loans’ market and impact other commercial banks’ behavior so that small and micro businesses can get loans more easily.The establishment of village banks change the competition situation among banks,further optimize the financial loan for the small and micro business.In respect of demanding’s view,it verifies that the development of village banks obtain better social performance.Overall,the business performance and financial service of the village bank will be improved by opening the rural finance market and intensify the competition of the market.The financial institutions will fulfill their obligations and create more economic welfare.Therefore,the government should stick to promote market-based reforms and further lower the threshold of financial market access in rural areas.What is more,it also should improve the subsidies policy,and build an incentive mechanism and encourage village banks to target the customers,differentiate and be distinctive on a business sustainable basis.It also need to strengthen supervision,constructed constraint mechanism and emphasize the concept that village bank serves ’three rural issues’.To drive the development of village banks,the financial environment and infrastructure should be improved as well.