ABC's Top Banker Trains an Elephant to Dance

The third line of defense was the internal compliance department, which was responsible to management and oversaw daily operational compliance risk management and control.

The fourth line of defense was the risk management dispatch system. Risk managers were gradually sent from the main bank to provincial banks, from provincial banks to city banks, and from city banks to county sub-branches to independently monitor and evaluate risk.

The fifth line was a complete shift for the inspection system. Provincial banks temporarily set up a professional inspection team of 15 to 20 people who go into an outlet and conduct a mandatory takeover for seven days while inspecting potential risks.

The sixth line is the earmark inspection system. The main bank has a specialized task force for unexpected inspections, such as on vaults, for example. I once braved torrential rain to go on a vault inspection in Lankao County.

Finally, ABC has many outlets, and the management radius is rather unique. So of course the best way to manage operational risk is to rely on a complete IT system and on staff members to develop a consciousness for long-term compliance. But the last two lines of defense also generate a good demonstration effect (by) educating and guiding staff members to do their work by the rules. Also, we bring in third parties to conduct independent evaluations of our outlets to improve the quality of our service.

Caixin: After you came to ABC, there was controversy over a regulator plan to split ABC to truly serve agriculture, rural development and farmers. Why did ABC not follow through on this plan? Weren't there good reasons to split?

Xiang: The National Financial Work Conference approved guiding principles for ABC's reform: serve agriculture, rural development and farmers, completely restructure, operate commercially, and go public.

At that time, China required that serving agriculture, rural development and farmers organically link with commercial operations, and that we strengthen our self-autonomy and control risk. If we broke up ABC, not only would it break up the Agricultural Bank of China brand built up over nearly 60 years and the advantages we hold across towns and cities, but the internal staff's reaction would have been fierce. Splitting up would make them feel abandoned and affect the stability of the workforce. In addition, management and supervisory costs of split-ups are very high, and internal transactions would be very complicated. After taking a comprehensive look, it was decided that, on the whole, going public was better.

Caixin: Seventy-five percent of ABC's business is in the cities. Only 25 percent involves agriculture. Even so, is the nature of your business for agriculture, rural development and farmers different than your city business? Is this a difficult issue for management?

Xiang: Based on assets, currently about 37 percent of ABC's assets are located in the countryside. All ABC business activity in the countryside has a driving function, a radiating function and direct service function for agriculture's development, rural economic prosperity and the well-being of farmers.

Currently, farm loan risk not terribly high. The financial environment in the countryside has changed a lot. Farmers are highly likely to pay back loans on their own. The interest earned on loans to farmers is higher than in the city by dozens of basis points, meaning the combined profit margin in rural lending is higher than in the city. Our branch in Heilongjiang Province hands out a relatively large number of loans, and the profit we earn on a 10 billion yuan loan there is equal to the profit we earn on a 16 billion yuan loan in Beijing. If you do it well, you can make money.

Concerns about agriculture, rural development and farmers are prejudiced. In the process of urbanization, many farmers have become quite well-off. Take our clients in the countrysides of Zhejiang and Jiangsu, for example. Our profits from them are more than our profits from our city clients.

Caixin: To promote agriculture, rural development and farmers, ABC set up an agriculture, rural development and farmer financial services department. But it's actually a countryside service department. Is this divided by region and not by service?

Xiang: The establishment of the agriculture, rural development and farmer financial services department was an internal framework meant to provide commercial service to agriculture, rural development and farmers. Its purpose is to clearly examine and calculate each service's cost and profit. From the main bank to the provincial banks to every county and every person, it should clearly show how much was spent. So, the agriculture, rural development and farmer financial services department system is a type of management framework, the key to which is to transform our thinking.

Caixin: Of all the many reform initiatives over the past three years, which do you think were most critical?

Xiang: The most important was the reforming of ABC according to a modern commercial banking model, framework and thinking. The closest to the core was the construction and transformation of corporate culture and thinking. If thinking remains closed, no matter how you change, it's useless. If you don't have a good corporate culture, a good system won't work for long. Only if you instill a culture of risk management into every staff member can you encourage them to act on their own.