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Attitudinal Asymmetries and the Lender-Borrower Relationship: Survey Results on Farm Lending in Shandong, China

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Abstract

This paper addresses the problem of social interactions and the lender-borrower relationship by measuring the disconnect between borrowers and lenders across a wide range of lending-related attributes. The degree by which lenders and borrowers connect disconnect depends on whether lenders’ and borrowers’ perceptions across these attributes are symmetric or asymmetric. We compare field survey results from 120 loan officers at Rural Credit Cooperatives (RCCs) in China’s coastal Shandong province, and pair them with an existing survey on identical questions to 394 farm households in the same region. Pairing lenders’ perception towards borrowers regarding RCC microcredit lending mechanism, against borrowers’ perception towards lenders and how themselves were perceived by lenders in the same regards, we observe on many dimensions a disconnect between them in the context of lenders’ “care” towards borrowers, loan rejection, memberships of RCC and group guarantee, lending concerns, cost of borrowing, reasons for default, credit rationing, and lending preferences. This research provides financial institutions with outreach mechanisms to borrowers, while also training lenders to borrowers’ sensitivities.

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Notes

  1. The other two major sources are Postal Savings Banks, and Agricultural Banks.

  2. Since the first RCC was founded in northern China in 1923 a number of transitions have taken place (Guo and Jia 2009; Shen et al. 2010). Guo and Jia (2009) reviewed the evolution and reforms of RCCs, identifying four main transitions. These include collectivization in 1958 when the RCCs were incorporated into the People’s Commune to mobilize capital for large-scale projects; the introduction of the Household Responsibility System (HRS) in 1978; The move to place RCCs under the direct supervision of the People’s Bank of China (PBOC) in 1997, rather than the Agricultural Bank of China, because of mounting non-performing loans on the RCC book. The PBOC embarked on lending programs that provided cheap loans to RCCs in 1998, resulting in a growth rate of 20 % for agricultural loan portfolios, largely due to the introduction of microcredit loan and group loan businesses to rural households (Cheng and Xu 2004). However, with continued poor performance of RCCs due to depressed prices of agricultural products and a long-lasting downturn of rural households’ income, the government was forced to deepen its RCC reforms even further. In 2003 there was a move to clarify the ownership of RCCs and to re-place them under the direct supervision of provincial governments. In recent years, the policy has centered on restructuring of the highly fragmented rural banking sector. The number of RCCs dropped precipitously from 19,348 in 2006 to 2,646 in 2010, although their total assets increased steadily indicating that many of them have undergone consolidation. (CBRC annual reports). This period was characterized by an RCC mergers and acquisitions spree, encouraged—and in some cases financially sponsored—by the State, with the aim of restructuring high risk RCCs.

  3. CBRC No.209, 2010 http://www.cbrc.gov.cn/govView_01935BE69968470C8989847E5A9BF2FD.html

  4. Managers and loan officers at Shandong RCCs that we surveyed in September 2011 mentioned in interviews that, the current RCC lending environment is a “lenders’ market”. They also indicated that their RCCs have preference of lending to SMEs over farm households.

  5. We will not identify the counties under a promise of confidentiality.

  6. Farmers’ views of the group guarantee mechanism has not been thoroughly investigated. In a recent paper Kong et al. (2012) investigated the issue using cluster analysis. Three clusters labeled ‘The Friend’, ‘The Distant’ and ‘The Distrusting’ was identified on whether farmers wanted to ask for a guarantee, could find a guarantor or did not want to provide a guarantee. The first cluster were willing participants in the group guarantee, the third cluster not willing participants and the second in-between. Combining these with regression analyses they conclude that the mandatory nature of group guarantees actually dampens credit demand. Evidence suggests that this may be a risk rationing effect; that guaranteeing another’s liability places collateral at risk in no different form than collateral is placed at risk for an individual’s loan.

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Acknowledgments

Authorship is shared equally. The original Shandong data was gathered by Rong Kong and her students from Northwest Agricultural and Forestry University under NSF grant 70873096. The Shandong lender data was collected by C.G. Turvey and his Cornell students Xiaolan Xu and Ying Cao from funds made available from the W.I. Myers endowment, Cornell University,, along with Rong Kong, Guangwen He from China Agricultural University and Jiujie Ma, Renmin University. The work reported in this paper is based upon the graduate research and thesis of Xiaolan Xu at Cornell University, 2012.

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Authors and Affiliations

  1. Northwest Agricultural and Forestry University, Yangling, Shaanxi, People’s Republic of China

    Rong Kong

  2. Cornell University, Ithaca, NY, USA

    Calum G. Turvey & Xiaolan Xu

  3. University of Guelph, Guelph, Ontario, Canada

    Ying Cao

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  1. Calum G. Turvey
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  2. Xiaolan Xu
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  3. Rong Kong
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  4. Ying Cao
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Correspondence to Calum G. Turvey.

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Turvey, C.G., Xu, X., Kong, R. et al. Attitudinal Asymmetries and the Lender-Borrower Relationship: Survey Results on Farm Lending in Shandong, China. J Financ Serv Res 46, 115–135 (2014). https://doi.org/10.1007/s10693-013-0171-5

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  • DOI: https://doi.org/10.1007/s10693-013-0171-5

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