A Research On Credit Risk Factors And Stress Testing Of Rural Credit Cooperatives

We can learn from the sub prime crisis erupted in2007that the soundness of the financial institutions has a significant influence on the stability of the real economy. The rural credit cooperatives is the mainstay of our rural finance, it takes the mission of supplying financial support to the development of the rural economy. Therefore, it is essential important to enhance the risk management of rural credit cooperatives in order to give powerful and sustainable financial support to the rural economy. Due to the weak foundation, heavy burden formed by historical reasons, special operating environment,’credit risks are much higher than those of the commercial Banks. Since2003, the People’s Bank of China has issued special loans and special central bank bills to help rural credit cooperatives improve the quality of their assets. By this means, the stock of the non-performing loans did reduce, however, the new non-performing loans are increasing these years, and this implies that it is impossible to resolve the high credit risks problem fundamentally just by supplying money to the rural credit cooperatives. Only by finding out the real reasons that led to the credit risks and take their countermeasures can the high credit risks of rural credit cooperatives be thoroughly reduced or eliminated.During the past years, there are few special researches on the credit risks of rural credit cooperatives, besides the only researches are almost focusing on qualitative analysis of the current situation and the inducements of the credit risk, the lack of systemic investigation and deep demonstration forms a striking contrast with the urgent situation of credit risks of rural credit cooperatives. Therefore, this paper conducts a special research on the credit risks of rural credit cooperatives. Compared with the previous studies, this paper both adopts qualitative method and empirical analysis with stress test approach using dates of49rural credit cooperatives of Jiangsu province from1998to2009. During the empirical analysis, we first establish credit risk models for rural credit cooperatives to validate the factors that influence the credit risks, and then we employ these models to carry out simple stress tests aiming at assessing the effects of adverse impacts on rural credit cooperatives.The research finds out that two kinds of factors have influence on the credit risks of rural credit cooperatives, one is the characteristics of rural credit cooperatives, including property form, management efficiencies, size, the proportion of collateral loans and the ability to lend to new customers through product innovation; the other one is the macroeconomic factors, including interest rate, inflation and the macro economy condition. Especially, the local economy condition, the whole province economy condition and the first industry condition can all affect the credit risks; and first industry condition have significant influence on farmers loans, agricultural economic organization loans and rural commercial loans. Additionally, the results of the sensitivity stress tests show that the decrease of the whole province economy growth rate will induce great shocks to the rural credit cooperatives, the impacts arise from the decrease of the local economy growth rate are much smaller, and the decrease of the agriculture economy has little threat to the rural credit cooperatives. Finally, through the scenario analysis we find out that the credit risks of rural credit cooperatives increase greatly when the macro economy slows down and meanwhile there is high inflation.