(Yicai) May 29 -- China’s smaller banks are disappearing at a faster pace due to weakened operational capacity, stiffer competition from larger rivals, and stricter regulation amid a slowing economy, with mergers and closures in the first five months soaring seven times from a year ago.

Some 184 micro and small Chinese banks have merged or dissolved since the start of this year, according to data from Enterprise Early Warning, a platform that tracks corporate risk. In comparison, the figure was 204 for the whole of last year, up from 77 in 2023 and 43 in 2022.

The operational difficulties faced by smaller and medium-sized banks result from a combination of changes in both external and internal environments as well as their own shortcomings, Xue Hongyan, a special researcher at Jiangsu Su Merchants Bank, told Yicai.

The consolidation of such high‐risk lenders is an important means of mitigating financial risks and helps improve their overall risk profiles, he added.

On May 16, the newly established Inner Mongolia Rural Commercial Bank combined 120 rural credit cooperatives and village banks in the Inner Mongolia Autonomous Region. The lender’s ownership is dominated by state‐owned capital, supplemented by high-quality private capital.

Village banks have borne the brunt of this consolidation. Last year, 99 of the 204 merged or shuttered institutions were village banks catering to rural micro-enterprises and farmers, and this year to date, 70 of the 184 exits have been village banks, Enterprise Early Warning data showed.

The economic downturn has led to lower demand for credit, thereby increasing the operational difficulties of the banking industry, Xue said, adding that as large banks leverage new technologies to expand their services into the main markets of micro and small lenders, the latter face major direct competition. 

The tightening of regulatory requirements for compliant banking operations in recent years has also led some struggling micro and small lenders to fail to meet the standards and exit the market, Xue noted.

Risk levels at village banks have surged as a result of various factors. Of the 357 banks placed on the central bank’s high‐risk list at the end of 2023, a high proportion were micro and small lenders, including many village banks.

Of the 341 village banks that have published financial reports for last year, 232 had annual net profit of less than CNY10 million (USD1.4 million), with 72 posting net losses, of which 19 were in the red for the second straight year.

Editors: Tang Shihua, Martin Kadiev