Tian Zengbiao, an impoverished farmer from Xinshengcun Village in the Ningxia Hui Autonomous Region, never dreamed of living in a nice, well-furnished house.

His fortunes, however, took a turn for the better after the Postal Savings Bank of China initiated a “credit village program” aimed at improving living standards in remote rural areas. The bank also helped Tian build four new sheep sheds, each 24 meters long.

It’s all part of China’s ambitious plan to lift the estimated 30.4 million people out of poverty, an endemic problem in rural areas where 576 million reside. To do that, rural finance, the weakest link in the nation’s financial services, needs upgrading.

So-called “inclusive financing,” of which rural finance is one part, has become a national strategy. That is defined as the range of banking products and financial services made available to poor populations, where low incomes lock people out of the conventional banking system.

Traditional banks haven’t seen rural financing as profitable in the past, according to a recent report by Ernst & Young. However, advances in technology are reducing the cost of serving low-income customers.

Ernest & Young predicts that Chinese bank revenue from “inclusive financing” will grow by US$63.4 billion in 2020. With loans to the capital-thirsty agricultural industry standing at just 1 percent of commercial banking credit, there’s ample scope for expansion.

Farmers’ access to conventional bank loans has been limited by a lack of credit data. Many are forced to borrow from “shadow banking” lenders, the report noted.

To boost commercial bank lending to smaller companies, startups, agricultural communities, impoverished groups and students, the People’s Bank of China last year announced a targeted cut in its reserve requirement ratio, available only to lenders in those sectors. It came into effect on January 25.

Banks with “inclusive financing” loans accounting for more than 1.5 percent of total lending receive a 0.5-percentage-point cut in the conventional benchmark reserve ratio. If relevant loans exceed 10 percent, lenders will get an additional 1 percentage point cut in the ratio.

The new policy should increase loans to the listed cash-strapped sectors and should especially spur more lending by smaller banks, said Zhao Yarui, a senior researcher at the Bank of Communications. But, she said, the impact may take some time to manifest itself on the bottom line.

At the prodding of the nation’s banking regulator, China’s five big state-owned banks have established “inclusive financing” divisions.

The Postal Savings Bank, a leading retail lender with the nation’s largest distribution network, set up a business unit in 2016 dedicated to serving rural areas.

In the past five years, the bank reported, credit extended to individually owned businesses in rural areas topped hit 2 trillion yuan (US$320 billion). The outstanding balance of those loans as of last September 30 exceeded 1 trillion yuan.

New business model

Banks are now working to develop rural business models that produce profits, minimize risk and shoulder social responsibility for the public good.

The Ningxia branch of the Postal Savings Bank initiated a special business model by designating 143 “credit villages” in poor mountainous areas. That has given farmers there access to funds for activities such as crop planting and livestock breeding.

Bank of Communications’ Zhao said big data technology should help lenders manage risk in rural lending.

Jack Chan, China financial service managing partner for Ernst & Young, told Shanghai Daily that banks should shift their traditional practice of extending loans on a one-by-one basis to designating target borrowing groups and developing easy-to-follow standards for the groups.

Ant Financial Services Group, an online service provider affiliated to e-commerce giant Alibaba Group, has created “acquaintance-based” loan services for rural applicants with little or no conventional credit history. It assesses applicants’ creditworthiness by talking to their business partners, customers and fellow villagers.

Ant entered rural financing two years ago, believing that low net-worth individuals in aggregate represent a market potential valued in the billions of yuan.

In the rural sector as of last September, the group said it had 178 million people using its payments services, 152 million purchasing insurance products and 65.3 million taking out micro-loans. Among the users, more than 2 million rural businesses gained access to Ant Financial services.

New players emerge

Qianhai Zhengxin, a unit of Ping An Insurance Group, now gives individuals and small companies lacking credit data equal access to its financial services. As one of the eight firms approved by the central bank in 2015 to develop credit-scoring systems, the company has adopted a set of standards to evaluate creditworthiness.

Rural finance is now attracting new players, like Lufax or the Shanghai Lujiazui International Financial Asset Exchange Co, a major online wealth management platform.

Lufax said that four-fifths of its funds come from first- and second-tier cities, while 80 percent of demand for loans comes from third- and fourth-tier cities, especially in underdeveloped areas in central and western regions of China.

China UnionPay, an association of bankcard issuers, has established a business unit to help improve payments systems in rural areas.

One of its member companies, China UnionPay Merchant Services Co, launched a tailor-made, mobile application for rural populations in 2016. Under the system, users can publish farm-product trading information on the platform and undertake financing transactions.

Smaller finance industry players seem the most poised to understand and connect with smaller communities in rural China.

The Shanghai Rural Commercial Bank extends about 30 percent of its loans to the countryside. At the end of last June, it had committed 62.7 billion yuan to rural borrowers. It has also signed an agreement with the Shanghai Agriculture Commission for a 30 billion yuan line of credit to support 42 local agricultural projects.