How can the supporting systems for mortgaging farmland management rights be established and improved?

The Third Plenary Session of the 18th Central Committee of the Communist Party of China proposed stabilizing the rural land contracting relationship and maintaining it unchanged for the long term, and, on the premise of upholding and improving the strictest farmland protection system, granting farmers the rights to possess, use, benefit from, and transfer contracted land, as well as the rights to mortgage and guarantee contracted management rights. In August 2015, the State Council issued the "Guiding Opinions on Launching Pilot Programs for Mortgage Loans Secured by Rural Contracted Land Management Rights and Farmers' Housing Property Rights," explicitly allowing pilot areas to carry out mortgage loans secured by rural contracted land management rights. This plays a positive role in improving the rights and functions of rural contracted land, solving the problem of farmers lacking effective collateral, and increasing farmers' access to loans. Through investigations in pilot areas such as Wuhan in Hubei and Pingluo in Ningxia, the author believes that in the process of advancing the farmland mortgage pilot, two types of entities should be distinguished, and relevant supporting mechanisms should be established and improved.

Regarding the entities of mortgage loans, one type is ordinary farmers mortgaging the management rights of their own contracted land, and the other type is new agricultural business entities such as family farms, cooperatives, and agricultural enterprises mortgaging the management rights of transferred land. For the former, since the land management rights belong to the farmers themselves, the management rights for the remaining term within the second-round contracting period can be mortgaged. Most regions in China carried out the second-round contracting in 1998, with a contracting period of 30 years; the second-round contracting period ends in 2028, and the remaining term of land management rights is more than ten years. Out of consideration for preventing and reducing risks, the financial sector may apply a further discount to the remaining term. For example, financial institutions in Pingluo County generally halve the remaining term for processing, and the farmer's land management right mortgage loan amount = land asset price x area x remaining term of the second-round contracting x 1/2. For new entities such as family farms, cooperatives, and agricultural enterprises, their land management rights are all obtained through transfer. Although the land transfer contract term is relatively long, at least 3 to 5 years, and many run until the end of the second-round contracting period, new business entities generally pay the transfer fee annually. Therefore, it can be considered that only after the new entity has paid the transfer fee is the management right truly transferred. Since the transfer fee is paid annually, the new entity actually only possesses the land management right for the current year. Therefore, when a new entity uses the management right of transferred land for a mortgage loan, the term can only be 1 year, and it must obtain the consent of the transferring farmer; the amount can only be calculated based on 1 year of management rights. To reduce operational risk, financial institutions may apply a further discount, and the new entity can apply for a loan again after repaying the loan and paying the transfer fee in the second year, repeating this cycle. The new entity's land management right mortgage loan amount = land asset price x area x discount.

The survey also found that because mortgage loans secured by farmland management rights have just started, the relevant supporting systems are not yet sound, which has seriously affected the enthusiasm of both transaction parties and the implementation of the pilot work. There is an urgent need to improve the relevant institutional arrangements in the following four aspects.

First, the land asset evaluation mechanism. Carrying out land asset evaluation is an important prerequisite for mortgaging farmland management rights and is also a basic task. At present, there is a general lack of specialized institutions for land asset evaluation and relevant methods for evaluating mortgaged assets in various places. The financial sector generally adopts the method of simply calculating the price of mortgaged assets based on the market price of land transfer, without considering factors such as planting varieties and investment in land facilities, thus causing a certain degree of distortion in asset prices and making it difficult to truly discover market prices. It is suggested that a specialized service mechanism for evaluating land management rights can be built by relying on local rural property rights trading platforms, such as land transfer service institutions. Of course, professional evaluation companies can also be relied upon to carry out the evaluation of mortgaged land assets. Various places can formulate scientific evaluation methods based on actual conditions that cover comprehensive indicators such as land transfer prices, planting varieties, facility investment, and soil fertility conditions.

Second, the land asset disposal mechanism. Whether mortgaged assets can be effectively disposed of is key to the sustainable development of mortgage loans secured by farmland management rights. That is to say, once there is a problem with the mortgage loan, there must be smooth disposal channels for the land management rights in order to disperse the operational risk of financial institutions. To build a disposal mechanism for mortgages of farmland management rights, the focus should be on improving and perfecting the three-level land transfer system at the county, township, and village levels, and improving the relevant functions and roles, so that farmland management rights pending disposal can be introduced into the land transfer system for transfer and realization again, making this system a hub connecting farmers and financial institutions. It should be reiterated that the mortgaged asset is the farmland management right for a certain period and does not involve the farmer's contracting right. The farmer's contracting period cannot be mortgaged, so there will be no risk of farmers permanently losing their land.

Third, the risk compensation mechanism. Overall, mortgage loans secured by farmland management rights are a new thing and are in the initial stage. Because agriculture is a weak industry with relatively high risks, and because farmland mortgage funds are small in scale and transaction costs are high, under the current situation where asset evaluation and disposal mechanisms have not yet been fully established, if risks are borne entirely by financial institutions and farmers, neither side will be highly motivated, making this work difficult to carry out. To smoothly advance this work, in the initial stage of the pilot, the government and financial institutions can jointly contribute funds to establish a risk compensation fund. Once financial risks arise, financial institutions can be compensated from the fund according to a certain proportion, thereby reducing the risks of financial institutions. When the pilot reaches a certain stage and the relevant mortgaged asset disposal mechanism is relatively smooth, the risk compensation system can be withdrawn in due course, and farmland management right mortgages can be left entirely to the market. It should be noted that financial risks should mainly be borne by the market. The proportion borne by the government's risk compensation fund should not be too high, and it should certainly not be fully covered by the government; otherwise, moral hazards such as financial institutions relaxing pre-loan review or even both parties conspiring to obtain fraudulent loans may occur. The author suggests that in the initial stage of the pilot, the proportion borne by the risk compensation fund can be around 60%, and gradually reduced, so as to enhance the risk awareness of both transaction parties and the sustainability of transactions.

Fourth, the rural credit system. From the current pilot situation, in carrying out business involving mortgages of farmland management rights, whether financial institutions lend to farmers is essentially not determined by the land management rights that farmers mortgage to financial institutions, but by financial institutions' comprehensive consideration of factors such as farmers' historical credit, industrial prospects, and repayment capacity. In other words, the current farmland management right mortgage is essentially still a type of credit loan, only a process of further enhancing farmers' credit by mortgaging farmland management rights. This situation mainly occurs because farmland management right mortgages have just started, the construction of relevant supporting systems is still very lagging, and farmland management rights still find it difficult to independently assume the role of collateral. Combining farmers' credit conditions and industrial development conditions with farmland management rights for examination has a certain rationality in the initial stage of farmland management right mortgage pilots. This requires various places to accelerate the construction of the rural credit system, establish credit files and credit ratings for farmers, and also carry out rating work for credit family farms, credit farmers' professional cooperatives, and credit agricultural enterprises, so as to achieve full coverage of the rural credit system and provide credit support for various entities carrying out farmland management right mortgages.

In addition, for the pilot work on farmland management right mortgages, various places should also strengthen talent team building and organizational system building, especially focusing on giving play to the functional role of farmland transfer service systems at all levels, and assigning work such as farmland management right evaluation, mortgaged asset disposal, loan intention registration, and preliminary review to the farmland transfer service system. The government should strengthen policy support for rural financial institutions carrying out farmland management right mortgage work, implement differentiated policies in areas such as taxes and fees, assessment, and deposit reserves, and stimulate the enthusiasm of financial institutions to participate in farmland management right mortgage work.