Financial Risk Assessment Of Rural Credit Cooperatives (RCC)

Agriculture is always regarded as the foundation underlying all our efforts to build the country. The development of rural economy exerts a great influence on the lifeblood of national economic development. In the ten consecutive years of2004-2013, the Party Central Committee set out the No.l document about the issues of agriculture, farmer and rural area. This shows the central government has attached importance to these issues. To solve the problems related to agriculture, farmer and rural area, it’s necessary to enhance rural economy development and provide financial support to it. The rural finance is mainly fulfilled by Agricultural Bank of China and Rural Credit Cooperatives, and the local RCC become the most significant financial ties connecting agriculture, farmers and rural areas. The RCC is often seemed as the bank established for the farmers. As the most important subject of rural finance, it’s the main force serving the development of rural finance. Compared with the financial risks of other sectors, those of RCC have their own features and they have a global and integral influence on the economy. For example, once there is a major run on the RCC, the payment crisis that might happen would lead to financial storm in rural areas and thus threats the social finance security and have the economy get into trouble. Therefore, the financial risks of the RCC would weaken the depositors’ payment capacity and harm their interests, thus severely impeding the security of rural financial order as well as the development of national economy. In summary, it’s strategically important to control the financial risk of RCC to the sustainable, stable and healthy development of the rural finance and even the whole country’s economy.To attain its research objective, this paper combines theories with cases:first of all, it analyzes the causes of the financial risks of China’s RCCs; then, taking HY RCC in Guang’an City as an example, it grades and scores its financial risks by applying CAMEL Rating System; finally, it establishes a financial risk control system aimed at controlling the financial risks of RCC. This paper consists of six chapters as follows:Chapter one is the introduction, elucidating the research background and significance of this paper, proposing the importance of controlling the financial risk of RCC, and introducing the design, methodology and anticipated result of this study.Chapter two is the literature review, reviewing the literatures of three areas, i.e. financial risk control, causes of risks in RCC and control over risks in RCC. According to the analysis and summary, the financial risk is an integrated concept on risk, and it is under the common influence of the external operating environment and various uncertain internal factors. In scholars’ opinions, the funding risk, financial structure and internal control are the main factors forming the financial risk. Apart from the common causes of ordinary financial risks faced by financing institutions, the financial risks of RCC are also caused by the intervention from policies and governments, inappropriate operation system, employees’poor quality, weak supervision, loose internal control and low-quality assets, etc. Presently, the researchers on risk control are focusing on the classification of risks, selection of indicators, and quality and profitability of assets. At its end, this chapter reviews a large number of literatures and proposes the analytical thought of the causes of financial risks in RCC and analytical method of control on financial risks in RCC.Chapter three is the theory summary of the financial risk control, defining the conception of financial risks. In a broad sense, financial risk is a comprehensive concept-it’s not only the concentrated reflection of the monetized business risk but also the concentrated expression of the uncertainties appearing in enterprise’s financial operation and active procedure. In this paper, the financial risk is a generalized concept. This chapter introduces the concept of financial risk control as well as the measures to prevent risks, eliminate hidden dangers, standardize the management, improve the efficiency, build a sound system of financial risk control, and establish multiple progressive defensive lines of financial control and diversified financial supervision.Chapter four summarizes the financial risk in RCC and analyzes the causes. Firstly, it introduces the general situation of the financial risk in RCC. After the RCC experienced the reform of1997and2003, its corporate governance structure has been increasingly improved and its asset quality and operational effectiveness have been remarkably promoted as well. The RCC has gradually step onto a pathway of benign development. In the meantime, however, it is still facing internal problems relating to the system, mechanism and strategic management as well as the external challenges such as industrial structure readjustment and interest rate liberalization. These problems pose great challenges on the RCC’s risk management. Then, this chapter digs deep into the causes of financial risks in RCC, including the policy and system, operational environment, service object, employees’quality and business structure.Chapter five takes HY RCC as the case, implements a comprehensive analysis on its control on the financial risk. This chapter also introduces the general information of HY RCC, analyzes its balance sheet and income statement during the period of2010-2012, and calculates the scores of this RCC on the indicators of five aspects, i.e. capital adequacy, asset quality, management level, earning position and liquidity. Then, it designs a financial risk control system for the RCC. This system is able to input and process the financial information and test the financial indicators, and it is even able to judge whether it’s proper to give out alarm signals. Finally, by use of financial risk control system, it comments the financial risk of HY RCC and provides recommendations for improvement.The sixth chapter is summary and scope of the whole paper.This paper achieves three results. Firstly, it structures a financial risk control system for RCC, containing the original financial information system, financial information processing system, financial index evaluation system and financial risk alerting system, five sub-systems in all. This financial system is equipped with a complete financial information operation procedure and is thus able to complete a complete process from collecting information, to judging whether to give out alarm signals, and to proposing coping strategies. So, it is an effective tool of preventing and handling risks. Secondly, combining the business environment of RCC with the particularity during its development, this paper classifies the financial risk indicators into three classes, gives a weight to the second-and third-level indicators respectively, and quantifies the qualitative indicators by means of questionnaires, and finally obtains the scores and grades of the RCC. Last but not least, this paper comprehensively and systematically concludes and summarizes the causes of the risks faced by the RCC, coining up with five causes which are the policy and system, business environment, service object, employee’s quality and business structure, In the meantime, it combines the aforementioned five factors while designing the financial risk control indicators, in order to control the risks.