China's financial regulator is urging stronger action to address risks in small and medium-sized financial institutions, as they face pressure amid transformation and business model innovation, experts said.

Going forward, smaller banks will shift focus from scale expansion to improving the quality of credit growth, they added.

At the 2026 regulatory work conference on Thursday, the National Financial Regulatory Administration called for a strong, orderly and effective approach to managing risks within small and medium-sized financial institutions.

The administration also stressed the need to steadily advance both the reduction in scale and improvement of quality of these institutions.

The conference underscored the policy directives from China's 2025 Central Economic Work Conference, with experts predicting that these efforts will accelerate the exit of village and township banks in 2026. This trend is reflected in the rising number of village and township banks acquired by larger State-owned lenders.

The NFRA's office in Huzhou, Zhejiang province, recently approved Bank of Communications' acquisition of Zhejiang Anji BoCom Rural Bank and the establishment of three BoCom sub-branches in Anji county, Huzhou.

As of Jan 8, Bank of Communications, Industrial and Commercial Bank of China, and Agricultural Bank of China had received approval to acquire and restructure a total of 10 village and township banks, converting them into subbranches.

Liu Jie, chief banking analyst at Tianfeng Securities, said that acquisitions of village banks by large State-owned commercial lenders are crucial for reform and risk mitigation.

According to the NFRA's announcements on its website, as of Thursday, 110 village and township banks had been acquired since the beginning of 2025. During the same period, another 147 village and township banks were absorbed through mergers, bringing the total to more than 250.

Dong Ximiao, chief researcher at Merchants Union Consumer Finance and deputy director of the Shanghai Institution for Finance & Development, said that the reduction in scale and improvement in quality of small and medium-sized financial institutions does not simply mean fewer banks, but rather a structural reorganization achieved through market-oriented and law-based approaches.

"Reform and risk resolution for small and medium-sized financial institutions are likely to focus on three areas: steadily advancing the market-based exit of high-risk institutions, strengthening corporate governance as the core of quality enhancement, and ensuring smooth reform while strictly preventing risk spillovers," Dong said.

A report by the China Banking Association said that while rural revitalization and integrated urban-rural development — along with targeted support policies — have clarified the development direction for small and medium-sized rural banks, stricter regulatory compliance requirements, intensified competition among peers with similar business models, and expanding new financial services have further squeezed their market space and customer base, making reform and innovation increasingly urgent.

jiangxueqing@chinadaily.com.cn