Market exits, mergers, tighter rules to reshape regional banking landscape

China has accelerated reforms and risk management practices among small and medium-sized financial institutions this year as policymakers push to build stronger, more resilient lenders that are better rooted in local markets and more effective in supporting the real economy.

One of the main approaches to restructuring small and medium-sized banks is to consolidate scattered institutions within a region into larger financial entities. Another is for sponsoring banks to acquire village and township-level banks and convert them into subbranches. Analysts believe such measures help integrate regional financial resources and reduce potential risks associated with an overabundance of such institutions.

Data from the National Financial Regulatory Administration show that as of Wednesday, a total of 82 village and township banks, 44 rural commercial banks and 38 county-level rural credit cooperatives had exited the market this year.

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In response to key challenges, such as weak corporate governance and insufficient risk control capabilities, financial regulators have continued to clarify responsibilities among stakeholders and guide the banking sector toward optimizing organizational structures through mergers and acquisitions, while steadily resolving existing risks, said Gao Zhengyang, a special researcher at Jiangsu Su Merchants Bank.

This round of consolidation is expected to strengthen regional financial stability, improve the layout of county-level financial services and enhance the overall effectiveness of financial support for the real economy, Gao said.

Zeng Gang, chief expert and director of the Shanghai Institution for Finance and Development, said the acceleration of reforms reflects a combination of regulatory guidance and market demand, signaling a shift from scale expansion to a more quality-driven development model.

Zeng said reform momentum is being shaped by mounting pressure from nonperforming assets and capital constraints at some smaller banks, where fragmented operations have heightened risk management challenges. At the same time, clearer policy direction has underscored the need to streamline the number of institutions while improving their quality, with mergers and restructuring helping to strengthen risk defenses. In addition, narrowing net interest margins have compressed bank profitability, making consolidation an effective way to cut costs, boost efficiency and enhance internal governance.

Looking ahead, Zeng expects reforms of village and township banks to deepen further in the second half. The scope of consolidation is likely to expand, with medium and large banks continuing to optimize their networks through mergers, restructuring and the conversion of village banks into subbranches. At the same time, reforms are expected to show greater regional differentiation: eastern regions will place more emphasis on market-driven consolidation and digital upgrades, while central and western regions will focus on resolving existing risks and improving the rural credit cooperative system.

He also expects small and medium-sized financial institutions to continue optimizing their ownership structures, appropriately adjusting the share of State ownership while regulating the orderly participation of high-quality private capital in the restructuring of low-risk institutions. At the same time, efforts will be made to improve long-term risk control systems, resolve nonperforming assets in a tiered manner and expand capital replenishment channels.

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Regulators are expected to guide restructured financial institutions to focus on agriculture-related sectors and local small and micro enterprises, while fostering differentiated competition.

The National Financial Regulatory Administration released a draft regulation in April, proposing to raise the minimum shareholding ratio of the principal sponsor of a village and township bank from the current 15 percent to 51 percent. Banking industry experts believe this move will help strengthen the accountability of principal sponsors of village banks and assist these institutions in enhancing their governance and risk resilience.

The administration also proposed increasing the minimum registered capital for rural credit cooperatives from 3 million yuan ($439,212) to 50 million yuan, and raising the minimum capital requirement for village and township banks to 30 million yuan. Previously, the minimum capital requirement was 3 million yuan for county-level village banks and 1 million yuan for township-level institutions.

Contact the writers at jiangxueqing@chinadaily.com.cn