Customers of four rural banks in central Henan province, and one from neighboring Anhui province to be repaid by the authorities from Friday, accordingly Statements made by provincial financial regulators late Monday.
They said that initial payments will be sent to customers with a total amount of less than 50,000 yuan ($7,445) as a deposit at a single bank. The officials added that separate arrangements for customers with more than this in their accounts will be announced when the time comes.
Refunds will be made by the other two banks, but regulators have not said where the funds will come from.
A 45-year-old entrepreneur from Wenzhou, eastern Zhejiang province, told CNN Business last month that his family was unable to reach a penny of his $6 million in life savings.
Transactions with small Chinese banks have become more frequent in recent years, with some accused of financial impropriety or corruption. But experts worry that a much larger financial problem could arise, caused by the fallout from a real estate crash and rising questionable debts related to the Covid-19 pandemic.
That’s a drop in the ocean of China’s vast banking system, but about a quarter of the industry’s total assets are held by around 4,000 small lenders, which often have uncertain ownership and management structures and are more vulnerable to corruption and sharp economic slowdowns.
Henan police said on Sunday they have arrested some suspects, accusing them of using rural banks since 2011 to illegally raise public funds.
Despite police intervention and the move to reimburse some depositors in the coming days, analysts warn that the crisis may not be over yet.
“The situation is still improving,” Betty Wang, senior China economist at ANZ, said in a note to clients on Tuesday.
“Despite the small size of the assets involved, the social impact of the event could be significant if not handled appropriately. It could also trigger another round of regulatory tightening,” he said. He added that Beijing could launch a new round of investigations into the online banking sector, village banks or “potential local corruption”.
Not everyone will be helped
Monday’s statements were the first word from Chinese authorities that they would repay the frozen funds.
However, Wang said many customers have much more than 50,000 yuan in these banks and are in the dark about the future of their life savings.
There are other exceptions to the plan.
In China, local banks are only allowed to take deposits from their own customer base, but in recent years it has become common for many small banks to partner with online platforms and withdraw funds across the country.
In early 2021, Beijing banned banks from selling deposit products via online platforms, fearing that the rapid expansion of the fintech sector could increase risks in the wider financial system.
But savers CNN spoke to say they say deposit products by banks are legal and protected by the deposit insurance program.
“If the incident is determined to be financial fraud or if the affected accounts are definitely not accumulating deposits, they may not be covered by the deposit insurance scheme,” Wang said.
In China, deposits of up to 500,000 yuan (almost $75,000) are guaranteed in the event of bank failures, but people could lose everything if the government’s investigation finds that these cases contain “incompatible” transactions.
Social discontent from the event could be a major problem for the government.
Wang said those most affected are low-income farmers, who have invested almost all of their savings.
“They see banks as the safest place, backed by government credibility. Improper handling of the problem can lead to social unrest and threaten stability,” Wang said. said.
“This can be particularly sensitive after local quarantines and before the 20th Party Congress,” he added.
— CNN’s Beijing Office, London-based Jorge Engels and Nectar Gan contributed to the report.
