Credit Risk Management Framework for Rural Commercial Banks in China

Abstract

Credit risk management (CRM) is to identify, measure, monitor, and control risk arising from the possibility of default in payments. Existing CRM tools available for large financial institutions do not meet the requirements of rural commercial banks (RCBs) because their main customers are SMEs and farming households whose financial data and credit rating records are not available. RCBs in China also expose specific risks connected to rural commercial banking business and in particular farming-related loans and services. Adopting a qualitative analysis approach to identify key factors contributing to failures of RCBs' customers, we endeavour to develop a CRM framework for RCBs in China. The framework, which is based on the identification of business failures of RCBs' customers and factors contributing to failures of SMEs and farming households, incorporates financial and non-financial variables. Using nonfinancial variables along with financial variables as predictors of company failure significantly improves credit analysis quality and accuracy. Also, this study recognises guanxi 1 as risk potentials and includes guanxi risks in the framework. This study has made contributions to the extant literature on CRM of banks in general and RCBs in particular.

Non-Performing Loans of Commercial Banks, and Their Causes: Evidence from Vietnam

“…Moreover, more bad loans lead to higher provision which can impact the bank performance because the provision is generated from prot. Then, the bank will get higher nancial leverage which can cause nancial bubbles of bank's credit risk [29].…”

“…According to Berger and DeYoung (1997) [28], the increase in nonperforming loans is due to the weakness in the credit appraisal process before, during, and after lending, leading to the bank's wrong choice of lending customers (customers not eligible for loans). According to Wang et al (2017) [29], the credit risk also occurs when the weak professional competence of employees in properly assessing the value of collaterals, businesses, and individual customers those are unqualied.…”

Historical Trends and Transitions in Credit Risk Management of Chinese Commercial Banks

“…In summary, the relevant research in developed countries can be very important reference point for the credit risk assessment of Chinese commercial banks, but this kind of reference should not be copied without question. (Wang, et al, 2017). Meanwhile, in response to the revision of foreign risk measurement models, Wu, Liu, and Huang (2010) suggested that the banks should consider data adoption, credit rating and market environment and human resources.…”

A Simultaneous Stochastic Frontier Model with Dependent Error Components and Dependent Composite Errors: An Application to Chinese Banking Industry

“…Banks in rural areas have short development times, with obvious geographical restrictions, and encounter challenges of backward information technology, such as a lack of high-speed wireless networks, big data, and cloud computing facilities. The strategies of credit risk management and services of online banking have also been shown to be lacking in RCBs [55]. Thus, an obvious technology gap exists between RCBs and other banks.…”