The Analysis Of Credit Risk Control In Rural Micro-Credit

The global economy is still in recovery, with every country tries all available ways to push the economy back on the way. Chinese government made a 4-trillion infrastructure investment from 2009 and this does make a great contribution to China's GDP growth. However, it's known that infrastructure investment is not a sustainable way of development. With exported being affected by the gloomy global economy, China has to pay more attention to consumption for development. China has the largest amount of rural residents, while they have the lowest average consumption. To boost economy in rural area and improve people's income there can of course increase consumption of rural area. This is why the central government keeps emphasizing rural affairs from 2004 to 2010. Rural areas have resources and labor, their under-development is attributed to the lack of financial services. Rural financial service is the key to rural development and China's sustainable development.Why don't financial institutions offer services in rural areas? There are many reasons, among with high cost and low returns are the key factors. Usually a loan must have collateral to decrease the risk the institutions faces. The problem is here, people in rural areas don't have qualified collaterals. Population density in rural areas is low and this could push serving cost high. What's more, it's harder for institution to get detailed information of loan applicants in rural areas than in cities. The more serious information asymmetry in rural areas makes the cost of selection and monitoring higher. Normal interest rate cannot cover service cost, which is the reason why common financial institutions are not willing to offer services in rural areas. If institutions can find ways to adverse selection and moral hazard caused by information asymmetry, they can make profit. This paper is to research the mechanism by which default risk in rural areas is controlled.This paper contains four parts:part 1 is about the background, goal, methods of this paper and literature review; part 2 contain chapter 3 and 4, which are to give a introduction of micro credit in rural areas and default risk control; part 3 will do with the analyzing of default risk controlling mechanism. There will be a case study in this part. Part 4 is the conclusion and suggestions for the development of micro credit in rural areas.