Employees at work in Jingning Rural Commercial Bank in Lishui, Zhejiang province. LI SUREN/FOR CHINA DAILY

China has seen a notable increase in the number of small rural banks being dissolved and consolidated into larger institutions this year compared to previous years.

This, analysts said, is part of the country's efforts to maintain stability and forestall risks in the financial sector.

Small-scale rural banks should precisely target local market dynamics, offer financial products that better fit the local economic environment, and meet the diverse needs of customers — which will help them develop a unique competitive edge, they added.

According to a report released by the China Banking Association earlier this month, the rural banking sector underwent a wave of consolidation last year as nearly 30 county-level institutions exited the market through market-driven mechanisms such as mergers, acquisitions, or dissolution.

The consolidation of China's banking sector has continued and accelerated this year, according to data from Shanghai-based Financial China Information & Technology Co.

As of late September this year, over 260 small and medium-sized rural financial institutions, including rural commercial banks and rural credit cooperatives, have undergone mergers and acquisitions, data from the financial data provider showed.

Rural banks that have been absorbed through mergers and acquisitions are being transformed into branch offices of the larger institutions that initiated the consolidation, said Dong Ximiao, chief researcher at Merchants Union Consumer Finance.

According to disclosures from a branch of the National Financial Regulatory Administration in Hebei province, Qinghe Jinnong Rural Bank in Qinghe county and Town Bank of Xiangtong Shahe Ltd in Shahe county have both received regulatory approval to be dissolved. Both counties fall under the jurisdiction of Xingtai.

The entirety of these two banks' businesses, assets, liabilities and all other rights and obligations have now been inherited by Bank of Xingtai as a result of the acquisition. The acquired institutions will then be established as branches of Bank of Xingtai, according to the local financial regulatory authority.

China's rural and small-scale banks have played a vital role in supporting rural vitalization, promoting the county-level financial ecosystem, and easing financing constraints for small and medium-sized enterprises, said Wang Hui, professor at the finance school of Central University of Finance and Economics.

However, as these institutions have grown rapidly, long-standing issues like insufficient capital, poor operations, and weak risk governance have gradually come to the surface, Wang said.

As these challenges have become more apparent, financial regulators have adjusted their priorities, moving away from solely incentivizing the growth of these institutions and toward a greater emphasis on risk prevention and resolution, Wang added.

Consolidation through mergers and restructuring, coupled with systemic reforms, represent a realistic path forward, analysts said.

On the one hand, this increases scale and boosts capital, which help better withstand risks. On the other, it also allows them to better leverage economies of scale and develop more effectively in the future, Dong said.

Although the number and proportion of high-risk small and medium-sized financial institutions have dropped noticeably in recent years, what's left are the "hard bones" — the subsequent disposal and risk resolution will be more difficult, and the situation they face is more complicated, he said.

Smaller financial institutions in the rural areas need to be down-to-earth, steady and progressive, and not blindly pursue too fast a speed, too large a scale, or too complex a business, said Tian Lihui, director of the Institute of Finance and Development at Nankai University.