Rural banking in China seems an unmissable opportunity: 700m potential depositors, the vast majority of whom have never been within spitting distance of a credit card or a standard adjustable-rate mortgage.
The catch is that few of them actually want them. With income uncertain – most are farmers or migrant workers, liable to be fired at any time – they tend to stash savings with credit co-operatives, postal savings bank outlets, or the Agricultural Bank of China. Servicing those 35,000 co-ops has not brought much joy in the past: non-performing loans to co-ops topped 37 per cent in 2002.
Still, that hasn't stopped foreign lenders. If Santander confirms talks with China Construction Bank to establish a rural banking joint venture – as rumoured on Thursday – investors can expect more boilerplate rhetoric about narrowing income disparities, echoing the industry regulator. As with recent rural bank-opening projects carried out by HSBC, Citi and Standard Chartered, operations will be small – 107 rural banks, most of them owned by Chinese lenders, had Rmb3.3bn ($483m) of loans outstanding at the end of last year – and talk of actual returns will be almost indecent. Net interest margins will be closely monitored, while losses may be a lot higher than the sponsors would tolerate back home.