(Yicai) July 7 -- China is accelerating reforms in its rural banking sector, with almost as many rural banks merging with other banks in the first six months as in the whole of last year, as part of efforts to reduce financial risk in the industry and improve services for residents in rural areas, according to the latest official data.

Eighty-nine rural and township banks were absorbed into or merged with other banks in the first half, almost matching the total of 94 in 2024 and far exceeding the 11 recorded for 2023, according to data from the National Financial Regulatory Administration.

The most common approach in this wave of mergers is for a bank that initially helped set up a rural bank to now absorb it and turn it into one of its branches, industry insiders told Yicai. These acquiring banks are usually regional city and rural commercial banks, although in some cases they are state-owned giants.

For instance, Industrial and Commercial Bank of China was given the go-ahead by regulators last month to absorb its wholly owned unit Chongqing Bishan ICBC Rural Bank and convert it into a local ICBC branch.

Another approach involves a major shareholder increasing its stake to a majority holding. Langfang Bank, for example, was given the green light in January to buy out other shareholders of Luanping Shengyang Rural Bank to take 100 percent equity and effect a merger.

"Many rural banks have scattered ownerships, which is a key reason behind their poor governance and weak risk control," a banking professional told Yicai. "Absorption into larger commercial banks helps address these issues."

"ICBC's restructuring of its rural bank sends a positive signal that reforms in the sector are speeding up," said Yang Haiping, researcher at the Beijing Wealth Management Industry Association. However, since not many rural banks were set up by the big state-owned banks, these large lenders are unlikely to play a major role in these mergers.

This sharp drop in the number of rural banks is not likely to affect financial services in rural areas, industry experts told Yicai. “The main goal of the reform is to reduce risk and improve services, not to reduce access to services,” one insider said.

Once these mergers are completed, rural banks’ bad loans will fall under the stronger risk management systems of their parent banks, governance flaws will be rectified, and they will be able to tap into the new shareholders’ resources, Yang said. The newly merged entities will be able to expand their services and offer more diverse financial products to better serve the different needs of rural clients.

"This not only helps defuse the risks facing rural banks but also improves the stability of the whole financial system," he added.

Editor: Kim Taylor