CBRC plans looser rules for rural banks

China is planning to lower entry barriers for financial institutions by allowing individuals to set up rural commercial banks, a move that experts said Thursday is part of the country's ongoing financial reform and opening-up process.

New draft regulations for small and mid-sized financial institutions in rural areas were released by China Banking Regulatory Commission (CBRC) on its website Wednesday.

The list of those who can set up rural commercial banks includes Chinese individuals, domestic institutions, foreign banking institutions and other organizations approved by the CBRC, the regulations said.

It would be the first time that individuals have been allowed to start rural commercial banks. A regulation for rural commercial banks issued by the CBRC in 2003 said that individuals could be shareholders in rural commercial banks, but they were not allowed to start them.

Allowing individuals to start their own rural commercial banks is part of the financial reforms that China has embarked upon, Tian Yun, editor-in-chief of economic research website macrochina.com.cn, told the -Global Times Thursday.

If China plans to achieve interest rate liberalization, it must further relax the market entry rules for the financial services sector, Tian said, noting that a loosening of the regulations will pave the way for further reform in the sector. Greater market access would also have the effect of boosting competition.

A healthy financial market should be open to all qualified players, and only then will interest rate liberalization be possible, Tian noted.

"State-owned banks have started to feel pressure due to potential competition in the future," Tian said. "It is good for them to know that they cannot enjoy easy profits based on their dominant position forever."

The new draft is part of a trend toward more relaxed market entry rules in the banking sector, Jin Lin, a senior banking analyst with Orient Securities in Shanghai, told the Global Times Thursday.

However, Lin noted that it's hard to predict the effect of the new regulation, as the approval of private bank licenses has not begun yet.

The investment by an individual in a rural commercial bank should be no more than 2 percent, according to the draft.

This limit is aimed at risk control, Jin told the Global Times, and is designed to prevent private capital from -rushing into the banking sector too quickly.

The CBRC wants to avoid rural commercial banks being started by people who lack the necessary "professional know-ledge and skills," Jin said.

According to the new regulations, the minimum registered capital of a rural commercial bank is 50 million yuan ($8.17 million), the same level as was stipulated by the regulations for rural commercial banks issued in 2003

The unchanged registered capital threshold is another indicator of the regulator's intention to relax market entry rules, Jin said.