Lack of clear land rights holding back development of Chinese agriculture

There has been much coverage lately on the diverging fates of two banks focused on China's rural population. China Postal Savings Bank announced it will seek to raise up to US$25 billion in an initial public offering next year. Meanwhile, China Commercial Credit was last week handed a delisting notice from the Nasdaq exchange.

Both institutions have focused on an underserved market: China's huge rural areas where farmers and thriving rural horticultural and agro-processing operators seek cash to expand. Despite government efforts to nudge banks to lend more, farmers have not been the most attractive market.

Thus, even though the Postal Savings Bank boasts the largest network (40,000 branches), the bulk of its lending goes to urban residents. Even if villagers bank their savings, lending to city dwellers is less trouble; banks can price collateral like houses, cars and factories more easily.

That's because most Chinese banks remain untrained in assessing livestock as collateral. More significantly, farmland isn't accepted as collateral due to the complex ownership system that makes holdings the property of the village rather than the farmer.

Another big challenge is agricultural insurance. Banks don't accept collateral that isn't insured and despite numerous government schemes to extend coverage, it remains a way off. Yet, uncertainty over the long-term ownership of their land often makes farmers unwilling to invest in insurance. Data from the People's Bank of China shows, on average, a third of credit extended by financial institutions in 2012 and 2013 went to rural dwellers. Yet, in many cases, the loans went to property developments registered in rural areas, and manufacturing projects. While banks can say they've met government targets for rural lending, agriculture-specific loans probably accounted for only a fraction.

The government has tried to entice banks into the underserviced rural sector, but while there was much enthusiasm in 2007 from foreign banks when they were allowed to enter the rural hinterlands, there hasn't been a flowering of branches.

The multinationals face similar challenges to the local banks in figuring out how to accept assets from the small and medium-sized farms which still dominate China's agricultural sector. Meanwhile, a network of rural credit cooperatives have in some cases suffered from misuse of funds by government-appointed managers who lent to risky real estate projects.