Large Bank Expansion into Rural Markets: Implications for Agricultural Lending and Risk Taking by Rural Financial Institutions

This paper examines the impact of large bank business expansion into rural markets on agricultural lending and risk taking by rural financial institutions. The results indicate that competitive pressure from the entry of large banks increased the volume of agricultural loans extended by rural financial institutions, reflecting a classic “catfish effect.” The expansion of large bank business compressed the lending space available to rural financial institutions, raising their risk exposure and producing a “risk effect.” The study also finds that, to mitigate their own risk‐bearing pressure, rural financial institutions tended to lower loan interest rates. This led to a narrower net interest margin and contributed to the exit of inefficient and high‐risk rural financial institutions from the market. The study suggests that the expansion of large banks into rural areas can contribute to a more competitive and higher quality rural financial market.