By putting up land as loan collateral, poor peasants risk being deprived of their only resource

Ketty L sent out this very informative article 土地承包经营权抵押应慎行

Key summary:
By putting up land as loan collateral, poor peasants risk being deprived of their only resource.


Context:
Recent policy change that allows peasants to transfer land usage right (the right to cultivate land, or the defacto land/property right)

The English translation roughly goes like this:

Caution Needed When Demanding Land Usage Right as Credit Collateral

"Currently, there is a trend that subjects peasants to giving up their land usage right. This may increase the risk for the peasants to loose their land", according to Chen Xiwen, deputy director of China Central Financial Leadership Group, during a news briefing held by State Council's Rural Development Economics Research Department (RDERD). He argued that under current condition, the practice of using land usage right and housing land quota as collateral should proceed with great caution.

Since the recent policy shift which allowed peasants to transfer land usage right, more and more people turn to land usage right as a solution to lack of capital liquidity in rural area. However, according to Chen and others experts who share his concern, using land usage right as a collateral is fraught with risks. In everyday practice, it tends to depress land value, deepen the inequality peasants often found themselves into.

Therefore, Han Jun, director of State Council Research Center Rural Office, suggested that the solution to rural credit problem may be found in micro/small credit programs and building a rural mutual credit guarantee system. Other alternatives include enhancing rural credit associations' fund raising abilities.

Based on recently reported cases, Chen thinks that the practice of using land usage right as collateral is not always fair to peasants.

For example, in April 2009, Liao Ning province started a pilot program that allowed using land right as credit collateral. The Chili Pepper Cooperative in the Fa Ku county Gangzi (township) subjected 900 mu land (150 acre) to appraisal by financial companies and was told that its one-year land usage right was worth 600,000RMB (US$85,000). However, after obtaining a series of certificates and licenses, the coop was only able to get a loan of 300,000RMB from the Rural Credit Union.

"When the land prices is suppressed like that, the risk is entirely shifted onto the peasants", Chen argued, "Is there not a better way to get a loan than putting up land usage right?"

In recent years, peasants have been increasingly vocal about the problem of obtaining credits. However, commercial lenders still shy away from rural areas, citing the lack of credible collateral as an excuse.

"Do the peasants have collateral?" Chen points out that, since 2007, the government has announced the policy that small loans in rural areas can be guaranteed up to 300,000RMB (without collateral). Because most peasants are tied to land or blood relatives, there exists the right social basis and conditions for easier credit.

"It is inexcusable if the reason of rejecting loan request is the lack of physical collateral." Chen posits.

While arguing for the small loan approach, Chen emphasized over and again that using land usage as collateral incurs social risk. Judging by the history of East Asian rural development, there is no precedence of using land as collateral.

"The problem of obtaining credit in rural areas still widely persists. Agri-enterprises have been affected by the financial constrain" This is an excerpt from the book, "Surveying China's Rural Area", compiled by scholars from the State Council's Research Center. The book contains the research reports from this organization over the last decade. For the first time, it reveals the results of a large scale survey of 1979 rural families, 180 villages, 216 enterprises, 103 Credit Unions and 340 rural commercial lenders, and 15 grassroots level financial institutes in 29 provinces.

The survey reveals that only a handful of rural enterprises have received credit from banks. 50% of the enterprises complained that the size of loan is always too small. In terms of meeting the credit needs, only 15.48% reported as satisfied (vs. aggregate credit needs).

The report also shows that funds raised among friends and family account for 58.11% of total credit sources. Those from Rural Credit Union accounts for 37.34%. A clear pattern in rural credit market is that due to limited sources of credit from official channels, unofficial sources play an important role in rural credit. According to the surveys, rural enterprises received 38.8% of their funding from friends and family, 16.4% from private lenders, mutual credit associations and other unofficial sources.


"Rural finance is a weak link in our rural policy", Han said. In his policy research paper, he proposed policy changes based on this observation. Like Chen Xiwen, Han considers rural small credit industry as a leading player in vitalize rural finance.

"Small lending meets peasants credit needs, we are just starting to see its impact." Han Jun said. The next step is to continue refining policies regarding small credit. For example, as of now, most of the small lending come as a result of policy initiatives that lacked commercial sustainability.

Therefore, Han suggested that, in order to ease the tension between the borrowers need for low-rate loans and the high operating cost of small lending, governments ought to learn from successful practices in other countries, and be innovative in policy design. For example, establishing channels to return some of the postal deposits back to rural area, training for grassroots level credit agents and to establish credit histories for rural borrowers.

Han also brought up another topic, which is "grassroots banking". Han suggested that we should re-evaluate our approach to rural finance reform. The central government has pumped in close to RMB 200 billion ($30 billion) to restructure rural credit unions but so far there is little to show for.

"We should encourage peasants to build their own organic credit market," Han pointed to several local cases as an example. With the help from poverty-reduction agencies and money from them, 1600 poor villages in Anhui province started their own credit unions, "which are managed by the peasants themselves."