China’s Banking and Insurance Regulatory Commission—the top anti-corruption watchdog—on August 12 said five rural banks in Henan and Anhui are suspected of serious crimes involving banking fraud that left thousands of bank customers unable to withdraw their money. 

Officials from Henan and Anhui announced last month that they would refund bank customers whose funds were frozen.

So far, the banking watchdog said 18.04 billion yuan ($2.68 billion) had been refunded to 436,000 bank clients who were victims of the fraud.

The rural bank scandal started in April when bank depositors in Anhui and Henan provinces could not withdraw their money. The banks blamed the system upgrade. The incident triggered large protests from depositors, some of which happened in front of the China central bank local office.

Depositors in those protests faced harassment and restrictions and were suppressed by men in plain clothes. 

To calm down outraged bank clients, China’s authorities opened an investigation into the alleged bank and agreed to refund depositors whose funds were frozen. 

According to the Wall Street Journal, China’s regulators said in July the investigation found that private investment company New Wealth Group with stakes in these banks, could tap into bank deposits. New Wealth Group fabricated lending contracts by colluding with bank employees to illegally take deposits and sell investment products. 

The journal reported that small-sized rural banks are considered a vulnerable entity in China’s banking system due to poor management. China’s rural banks’ bad loans accounted for 3.4% of outstanding loans in the first quarter, compared with a national average of 1.7%. 

According to experts, bad loans are often underreported across the banking system in China. Wall Street Journal cited China’s Audit Office saying 23 small- and medium-size banks underreporting 171 billion yuan (about $25.3 billion) of nonperforming loans.

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