An Analysis of Two Common Misconceptions About Rural Internet Finance
Whether we accept it or not, internet finance, a new wave born against the backdrop of the information economy, financial repression and interest rate marketization, is rapidly changing the face of China's financial industry.
At present, internet finance has already made great contributions to promoting inclusive finance, raising the financing coverage rate of small and micro enterprises, and lowering the threshold for investment and wealth management, and it has inspired boundless imagination. As the development of internet finance gradually stabilizes, the entire industry is searching for the next explosive growth point.
We believe that the next blue ocean for internet finance will appear in rural areas. China's rural population is large and the market is vast, yet it is also a “half-wasteland” of financial coverage. Demand for capital here is strong, yet supply is insufficient; the desire for development is intense, yet economic “hollowing out” has occurred. As the blood vessels of the real economy, finance clearly supplies too little blood to rural areas, and its service level needs to be raised. The penetration of internet finance into rural areas will help improve this problem.
In recent years, the rural economy has been moving onto the path of “e-commerceization” and “informatization.” Once the proportion of e-commerceization reaches a certain level, internet finance will be able to accurately position itself in this ocean, and through deep integration with new economic forms, it will drive China's rural areas to undergo a transformative change across the ages!
[The core viewpoints of the report are as follows]
Two misconceptions.
First, rural finance is not poverty alleviation finance or charitable finance. Financial institutions cannot be required to support rural finance single-mindedly regardless of their own profitability. Poverty alleviation finance and charitable finance can serve as useful supplements to rural finance, but they are by no means the whole of rural finance. For rural finance to gain lasting vitality, it must adhere to commercial sustainability, must return to the essence of business, and must allow the relevant financial institutions to raise lending rates above the break-even point. A World Bank study pointed out that “whether in Latin America or Asia, the average annual return on investment for farming households and micro-enterprises can reach 117%-847%. Countless cases in China also show that those farming households and micro-enterprises with scarce capital, once they obtain funds, can create a marginal return on investment much higher than that of large urban enterprises.”
Second, rural finance is also not entirely agricultural finance, but rather “three rural finance” covering rural areas, agriculture and farmers. In the same research report, the World Bank also pointed out that it is necessary to avoid “replacing broader rural finance with narrow agricultural credit.” A good financial system should be able to promote rural development while improving farmers' welfare levels. Compared with traditional finance, internet finance places greater emphasis on the concept of an ecosystem and can better provide services with rural areas, agriculture and farmers as a whole, thereby more fully bringing out the great synergistic effect of financial services and promoting leapfrog development of the new rural economy.
1 As an advanced form of the economy, finance has resource allocation as its core function. The biggest bottleneck in China's rural finance lies in the distortion and low efficiency of resource allocation. Scarce financial resources are occupied by “large agricultural operators,” “leading enterprises” and other economic units that are “not short of money.” This system, which ought to “send charcoal in snowy weather,” has become a place of “adding flowers to brocade.” Because of layer-by-layer reporting and level-by-level approval, the timeliness of government agricultural support funds is greatly reduced, and financial activity becomes a “slow ox pulling a fast cart.” Through its multiple advantages such as being grassroots-based and fast, internet finance will truly embed financial services into every link of the rural economy, alleviate resource misallocation, and improve allocation efficiency.
2 In China's rural economic activities, the proportion of cash use is high, leading to low payment efficiency and a persistently high degree of economic informalization. In recent years, traditional finance has actively innovated and developed products such as “remittance by address,” “benefiting farmers cards,” “cardless withdrawal” and mobile banking. However, these products still suffer from problems such as dependence on physical branches and poor user experience. New internet finance paradigms such as online payment and mobile payment have already embedded rich scenarios into the payment field, with outstanding results. Once these applications are truly combined with rural scenarios, they will inevitably produce a “1+1>2” effect.
3 From experience and field research, the core problem of rural finance still lies in credit. For farmers, this problem is more often reflected in the availability and price of loans. For financial institutions, it is loan risk and returns. Against the background of economic hollowing out in rural areas, low educational levels among farmers, scarce financial information and insufficient collateral, the imbalance between capital supply and demand will persist for a long time. Relying on technologies such as big data and cloud computing, internet finance introduces unstructured data to tap potential demand, precisely allocates resources, and improves the effectiveness of post-loan management. At the same time, rapid disbursement and flexible terms also effectively reduce farmers' financial costs.
4 China's rural areas combine a large population with vast land and sparse people, so the construction cost of physical branches is high and the population covered is limited. After research in many places, the cost of a standard physical branch is usually close to 2 million yuan RMB per year. Internet finance uses technological advantages to cover the same population at a much lower cost. In particular, when mobile phones are no longer merely communication tools but national infrastructure, and become an “extension” of users, the marginal cost of internet finance covering rural areas will approach zero!
5 “Every farmer is an entrepreneur.” For the vast number of farming households with a history of thousands of years of independent operation, this statement is not an exaggeration. Chinese farmers have the strongest vitality and creativity. Reform and opening up began as a spark from the “household contract responsibility system” and ultimately formed a prairie fire. After the e-commerce economy swept across cities nationwide, with the rise of new farmers (see Figure 3), the rural economy is undergoing a process of “e-commerceization.” The high-frequency, small-amount and fast characteristics of e-commerce are highly consistent with the traditional one-household operation model of rural China. Once “e-commerceization” reaches a certain level, internet finance can use the data accumulated on e-commerce platforms to embed itself in the new rural economy and help the new economy develop.
6 Another core issue of the credit problem is the loan repayment rate and the bad debt rate. For many years, “blood-transfusion-style” credit has failed to effectively improve repayment capacity in rural areas, and this is precisely an important reason for the high default rate of joint guarantee loans among traditional small-amount farmer loans. When internet finance is combined with e-commerce, a new “blood-making” finance paradigm emerges, which can effectively solve the problem of insufficient repayment capacity, reduce default risk, and improve the financial environment under the new rural economic environment.