Academic journal article Advances in Management

Innovation on Risk Management of Rural Microcredit in China-Case Study of Puyang Model

Academic journal article Advances in Management

Innovation on Risk Management of Rural Microcredit in China-Case Study of Puyang Model

Article excerpt

Abstract

In the last three decades, China's microcredit mechanism in rural areas has developed rapidly. Risk management is a sensitive issue to all of the financial institutions including microcredit institutions. Many of the financial institutions do not accommodate microcredit due to the uncertainty of recovering the interest including capital. Rural Credit Cooperatives of China (RCC) and other state-owned banking institutions do not want to conduct microcredit business because they cannot keep away from high risk. Puyang Model created by The Rural Loan Cooperative of Puyang City, Henan Province, China made an innovation on risk management of rural microcredit and gained national-wide fame in China. The Rural Loan Cooperative of Puyang(RLC) has since become the largest NGO microcredit institution in China. This paper seeks to conduct an analysis of the innovative risk management practices devised in the Puyang model because it could provide positive implications for the development of microcredit that could be applied in all over China.

Keywords: Innovation on risk management of rural microcredit, mutual aid system, village centre director system, Rural Loan Cooperative of Puyang City (RLC).

Introduction

Microcredit was introduced into China from Bangladesh in 1993 through establishing a non-governmental microcredit institution named Yixian (Yi County) funding the Poor Cooperative, Hebei Province. Since then, a lot of microcredit institutions were set up. But some of them have gone bankrupt or are in the difficulty of microcredit business because of their bad risk management.

Comparing with ordinary loan, microcredit is confronted with more credit risk. But this risk is controllable through proper regulation and management method1. Most of microcredit risk management learned the experience from non-conventional finance institutions. Kranhnen and Schmidt14 considered that the repayment ensuring mechanisms promoted by informal financial institutions had two ways, one was restriction of all parties'

relationship and another one was peer supervision. Impávido9 pointed out that under the condition of not-having physical collateral, the social sanction of group lending could play the role of physical collateral and joint liability of group lending could take the function of monitoring and social sanction. Stiglits12 and Varían21 discussed that joint liability mechanism could force peer members of every team to monitor each other through mutually-known information. Besley and Coate2 discussed the affect of borrower's repayment initiative caused by joint liability. Montgomery17 introduced the concept of "social capital" to the microcredit field. He considered the deliberate and purposive repudiation or defraud could greatly reduce the borrower's social capital through spoiling other members' profit and his own fame and credit level.

Rural Loan Cooperative of Puyang City (RLC) is a microcredit organization initiated by non-governmental personnel and non-governmental capital. Its innovative risk management made it become the most successful and largest microcredit NGO in China. This paper discusses its innovation on risk management and its positive implication because its innovation on risk management is undoubtedly one most important factor of its outstanding success. This paper intends to analyze the innovation on risk management created by RLC, points out the problem of microcredit undertaken by RCC. Authors believe that RLC's innovation on risk management could provide a positive implication for the development of microcredit in rural China. Now we go to see what and how is RLC.

Brief to Rural Loan Cooperative of Puyang (RLC)

Why do authors choose Puyang Model as analysis sample?

High fame in China: Puyang Model is a new typed rural cooperative model innovated by Mr. Xu Wensheng, a former loan officer who worked in Puyang Branch of Agricultural Bank of China. Mr. Xu designed one kind of microcredit method under the support of Poverty Research Centre of China Academy of Social Science and conducted a pilot experiment relying on Rural Loan Cooperative of Puyang City, Henan Province. …

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