Are China's Financial Reforms Leaving the Poor Behind - Harvard ...

survey found an average overdue rate in 1995 of 21 percent and the CRPS survey foundan average overdue rate in 1996 of 39 percent. These results are roughly consistent withour estimates of the non-performing loans in the 4 sample provinces, and reinforce ourfinding that repayment problems are significant everywhere but substantially worse inpoorer regions.However, although the levels of overdues are greater in poorer townships, the rateof increase in overdues is as rapid in Zhejiang, 8 percent, and in the richest quantile oftownships, 12 percent, as in poorer provinces and townships. As a percentage of theinitial share of bad loans, the increase is most rapid in the richest quartile, 32 percent peryear, followed by the poorest quartile at 14 percent. The bad loan problem striking ruralfinancial institutions in China’s coastal areas is the result of poor bank governance(incentives of managers) in some areas, the deteriorating profitability of rural enterprises,and the increasing frequency of strategic default on loans (Park and Shen, 2000). Theseproblems may be related to overall slower growth, intensifying market competition, andunrealistic over-investment in the early 1990s.We also note that the deterioration in loan performance appears to be greater forRCCs than ABC branches, and that based on data from Sichuan and Shanxi thedeterioration is very sharp for TVEs but nonexistent for household loans (typically foragricultural production or self-employment). In Sichuan and Shaanxi, by 1997 nonperformingloans accounted for 38 percent of outstanding TVE loans compared to 23percent in 1994. Meanwhile, overdue household loans were stable at 32 and 33percent(Table 4).18