Inclusive Finance Listed as a Priority in Deepening Rural Reform: Funds Going Directly to the Fields

The financial problems that have long plagued rural areas may be on the verge of a solution with the arrival of the Internet Plus era.

On November 2, the General Office of the CPC Central Committee and the General Office of the State Council issued the "Comprehensive Implementation Plan for Deepening Rural Reform," calling for accelerating innovation in the rural financial system, “expanding the scale and coverage of rural financial services, innovating rural financial service models, comprehensively improving the level of rural financial services, and promoting the development of inclusive finance.” The industry generally believes that Internet Plus will be an important way to achieve inclusive finance in rural areas and solve the “last mile” problem.

"China Times" has learned that internet finance has already made major inroads into rural areas. Loans from Yilongdai, CreditEase, Xiwang Finance and others serving agriculture, rural areas and farmers have reached tens of billions, with Yilongdai's transactions exceeding 15 billion.

Yu Jianrong, director of the Social Problems Research Center at the Institute of Rural Development under the Chinese Academy of Social Sciences, believes that rural finance needs to solve the problems of capital cost and credit. “Take Yilongdai, which solves things through teams of five or six people. The greatest significance of the internet lies in transparent information communication and oversight. I am hopeful that the internet can solve China's rural financial problems.”

The “Triple Gate” of Loans

Just how difficult is it for farmers to get loans?

A "China Times" reporter once conducted a survey of rural credit cooperatives in Hebei. For farmers to obtain a loan from a local credit cooperative, they must meet three hard requirements: owning a storefront on a commercial street, holding a deposit certificate at the credit cooperative larger than the loan amount, and having a civil servant who receives their salary through the credit cooperative serve as guarantor. Such high thresholds are not an isolated phenomenon but the general reality of loan difficulties in rural areas.

Yu Jianrong told a "China Times" reporter that the current state of rural finance can be summarized as follows: first, the problems of illegal fundraising and fraud in rural areas are becoming increasingly prominent; second, usury is very serious. “We once conducted a survey in which 16.8% of people said they needed money, 56.8% said their funds were very tight, and 69.6% of farming households said rural loans were inconvenient. Usury in lending is also very serious.”

The main assets of farmers are land, forest land and houses, but given the current nature of rural land, land cannot be used to obtain mortgage loans from banks. This plan proposes “steadily carrying out pilot programs for mortgage loans on rural contracted land management rights and farmers' housing property rights, and innovating and improving the forest rights mortgage loan mechanism.” In fact, last year the State Council issued the "Several Opinions on Financial Services for the Development of Agriculture, Rural Areas and Farmers," explicitly requiring “innovation in rural mortgage guarantee methods,” with land, forest land and houses all included in pilot mortgages or expanded scale. But this has not alleviated the difficulty farmers face in obtaining loans.

The bigger problem with farmers' loan difficulties lies in the institutional arrangements of traditional banks. A person from a Hebei rural credit cooperative told a "China Times" reporter that farmers' mortgage loans are small in amount, and forest rights and land contract rights face valuation difficulties. “Even for a loan of tens of thousands to a farmer, you need risk control and management personnel comparable to those for a million-level loan. Banks will consider the cost issue. There is limited room for mortgage loan operations.”

With the arrival of the Internet Plus era, the difficulty farmers face in obtaining loans is gradually being broken down. Internet finance P2P platforms connect urban and rural areas, break down geographic branch boundaries, and allow idle funds from urban residents to flow to rural areas through platforms. This connection achieves financial integration between urban and rural areas.

At present, CreditEase, Xiwang Finance under New Hope, and Legend Holdings enterprise Yilongdai have all established a presence in the rural financial market. In addition, Alibaba, JD.com and others have also begun vigorous expansion. Compared with many traditional banks that only take deposits in rural areas without lending, internet finance enterprises have to a large extent taken on the function of supplying blood.

Cai Kailong believes that internet finance has grasped the characteristics of rural China and addresses farmers' difficulty in financing and their need for fast loans. “With Yilongdai, for example, as long as the documents are complete, funds can be disbursed in one to three days. This truly down-to-earth approach has great vitality.”

Paying Debt with Sheep

In 2013, the Third Plenary Session of the 18th CPC Central Committee wrote inclusive finance into a Party resolution for the first time. In the 2014 State Council executive meeting, Premier Li Keqiang proposed that shortening the “last mile” of rural economic development requires support from multiple parties. Rural inclusive finance has developed rapidly, and farmers engaged in specialized rural breeding and planting have begun to enjoy the benefits of online lending.

Zhang Bingyin of Gongliu Village, Guanhui Town, Xiangcheng City, Henan Province, is a large-scale pig farmer. This year during the Spring Festival, pork prices continued to decline. Old Zhang had no money to buy feed but was unwilling to sell his pigs at a low price. With no way to get a bank loan, he saw Yilongdai's “no collateral, no guarantee” advertisement and went to Yilongdai to obtain a credit line of sixty thousand. Later, pork prices rebounded from the bottom, and Old Zhang earned back all the money his pig farm had lost last year.

Most Chinese farmers do not know how to use the internet, so how do they engage in online borrowing? Yilongdai uses a local franchisee model, setting up loan outlets throughout rural areas, with its network extending to more than 300 prefecture-level cities, more than 1,500 counties and districts, and more than 10,000 townships. Farmers can enjoy borrowing services without leaving their village entrance.

However, for internet finance, core issues such as asset acquisition and risk control management remain unavoidable. Especially since agricultural profits are thin, where does Yilongdai's opportunity in rural areas lie?

Yilongdai CEO Wang Sicong introduced that what they do is all specialized rural planting and breeding. “Farmers who genuinely grow grain may not be able to borrow this money.” Even positioned in specialized agriculture, Yilongdai still faces the problems of farmers absconding and non-performing loan rates. Wang Sicong did not avoid this issue either: before 2012, Yilongdai's loss loan rate was basically 80 to 90 percent, and after 2014 the loss loan rate came down. “For farmers, absconding carries a very high default cost. Through systematic adjustments, the loss loan rate has now dropped to 3%. This is mainly because we increased personal guarantees and also required farmers to sign lease agreements. We are constantly learning through trial and error and iteration.”

"China Times" has learned that Yilongdai does not make mortgage loans but credit loans. Farmers' borrowing needs depend to a large extent on franchisees across the country. Traditional rural areas remain acquaintance societies, and the franchise model can penetrate into every village.

Wang Sicong believes that Yilongdai's franchise model helps reduce costs, but Yilongdai still must guard against risks from franchisees.

“Before 2012, some franchisees ran off together with the borrowers. At that time the system was not sound. After joining Lenovo, we completely changed. Lenovo uses an agency system and franchise system. Yilongdai joining Lenovo brought the management of franchisees nationwide up to a big new level.”

In order to reduce the risks for borrowing farmers, Yilongdai's operating model differs from banks' mortgage loans, instead handling different agricultural products flexibly. Wang Sicong said in an interview with "China Times" that rural areas are special. For example, if sheep prices fall in Inner Mongolia this year, repayment will be relatively difficult. “Yilongdai can do extensions, interest rate adjustments, even discounts, and can also negotiate with farming households. Banks definitely cannot do this. If the farmer cannot make it raising sheep, then give us the sheep.”

Thanks to continued lending to farming households, many farmers have embarked on the path to prosperity, and their credit lines keep getting higher. Wang Sicong believes that rural areas need long-term financial support. For example, two vegetable greenhouses can borrow sixty or seventy thousand, and after developing to dozens of greenhouses they can borrow several hundred thousand. When they become industry leaders, they can also borrow several million. “As we promote the market, our financing costs and operating costs will also decline, and lending costs will decline too. We hope to cover more farming households.”

At present, besides Yilongdai, CreditEase and Xiwang Finance, which largely use similar models, delivering money to the fields. Yu Jianrong believes that P2P can solve problems such as rural financing difficulties and will make a great contribution to the development of rural finance in China. Internet finance can change rural areas.