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| The Management of Provincial Cooperative Unions and its Influence on Improving RCC Efficiency: A Theoretical and Empirical Study |
| ZHANG Ruihuai, SUN Yong, LI Jiage, REN Danni, ZHENG Liujiang
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| Guiyang Central Sub-Branch, the People's Bank of China |
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Abstract The reform of the Provincial Cooperative Union (PCU) is the main aim in the current Rural Credit Cooperatives (RCCs) reform. Document No. 1 from the central government raised the issue of promoting it for three consecutive years from 2016 to 2018, but no substantial progress has been made nationally. The reform faces challenges, particularly in terms of decreasing the management function of the PCU. The specific concerns are as follows. First, in terms of management capabilities, most RCCs do not achieve a level of governance that enables them to develop independently, various moral hazards may emerge, and regional financial stability and rural financial services can be affected once the PCU withdraws from management. Second, in terms of the equal rights and responsibilities, the PCU is responsible for the management of local RCCs on behalf of the local government. The phasing out of its management may lead to local governments assuming responsibility for RCC development and consideration of risk while they cannot effectively manage them. Third, in terms of regulatory resources, the PCU plays an important role in the risk prevention and control of RCCs and makes up for any shortcomings resulting from insufficient supervision in the current county areas. The withdrawal of its management may bring greater pressure on local regulatory authorities. Since 2017, various risks in RCCs have been exposed, not only in terms of their weak management capabilities but also revealing loopholes in the PCU management system and in industry supervision. This poses a fundamental and difficult question concerning the current reform of the PCU: how can we evaluate the impact the PCU has on the efficiency of RCCs？
Our research object consists of 75 county-level legal RCCs in Province A, and we develop a questionnaire for 150 of their senior executives and department heads and a survey of their operation statuses from 2010 to 2017. We then provide a detailed summary of the management and service functions and characteristics of the PCU. We then introduce an empirical method to indirectly analyze the impact of the PCU on the efficiency of RCCs, by comparing the differences between the orientations of PCU management and the improvement in RCC efficiency, and conduct an empirical analysis of the survey data of the 75 research subjects.
Our main empirical conclusions are as follows. First, the efficiency levels of the sample RCCs have not significantly improved in recent years, and the differences between samples have remained comparatively stable. Second, PCU management is susceptible to short-term performance goals, leading it to push RCCs to continuously increase their business scale and total income. Indicators such as loan growth and the total cost-to-income ratio are closely related to the short-term business aims of RCCs, so they have the most significant impact on the outcomes of the PCU assessments of RCCs under management. However, in terms of indicators such as deposit and profit growth, current loan recovery, provision coverage rate, and the level of supporting agriculture and corporate governance, the PCU offers no effective incentives or constraints. Third, although the PCU’s management orientation broadly meets the requirements for improving the efficiency of RCCs in terms of several key indicators, when the scope of the indicators is expanded, i.e., with increased management objectives, its management orientation deviates from the general direction of efficiency improvement for the RCCs.
Our study makes three main contributions to the literature. First, our analysis of the specific management and service content and related restraint methods of the PCU is more systematic and detailed than in previous studies. Second, we conduct a quantitative evaluation of the management orientation of the PCU, based on the criteria and results of its assessment of RCCs. Third, we address the empirical problem of how the management of the PCU affects the efficiency of RCCs, and propose an innovative empirical method and test province A as a sample. We explore the potential reasons why the management orientation of PCU is in line with or deviates from of the direction of efficiency improvement in RCCs.
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Received: 20 May 2019
Published: 03 August 2020
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