China banks stoke controversy with loans to boost pensions

Rural banks in China have created a public stir by targeting low-income earners and the elderly with loan products designed to plug their pension shortfalls as lenders get creative amid soft borrowing demand.

Banks in Hunan and Sichuan provinces have, over the past few months, offered loans for borrowers to increase their contributions to China’s social insurance system in order to draw higher pensions or for making a one-time payment to qualify for old-age benefits.

The practice, which has been backed by some local authorities, has recently sparked a public debate over the risks of adding to the debt burdens of elderly with weak finances. That prompted many banks to take down publicity materials from their social media accounts. The Hunan Rural Credit Cooperatives Union also ordered its local lenders to suspend such offerings, according to sources familiar with the matter.

The nation’s pension system is optional, and has had a difficult time in attracting contributions with many people cash strapped after years of sluggish growth. Facing huge pension payment in the coming years, China this year raised the retirement age for men to 63 from 60, and to 55 from 50 for female workers.

China stipulates that residents can only draw from the public pensions after reaching retirement age and having contributed to the system for at least 15 accumulative years. Still, those who fall short of that period can make a supplementary payment to qualify.

That has created an opportunity for small Chinese lenders desperate for borrowers as China’s soft economy put a damper on loan demand from businesses and households. Some rural lenders, including Hunan Linli Rural Commercial Bank and Hunan Hanshou Rural Commercial Bank, had doled out tens of millions yuan in such loans, according to local media Yicai.

The loans, typically 90,000 yuan (S$16,085) in size with a maximum 15-year term, have interest rates ranging from 3.1 per cent to 3.45 per cent according to on-line promotional materials. Some have capped borrowing at the age of 65.

The product has also attracted one of China’s mega banks. A local branch of the Agricultural Bank of China recently made such a loan in Tibet to finance a resident who was short of cash for his pension payment, the bank said in a statement on Tuesday (Jul 8).

While controversy is growing, the loans had won the endorsement of some local authorities eager to boost enrolment in China’s social insurance schemes, seen as enhancing residents’ awareness and probability to pay up and enlist.

A district level social security authority in Panzhihua of Sichuan province recently joined with a local rural lender to promote pension enrolment and the bank’s loans that aid such payments, according to a government release on Tuesday.

In June, a district-level government in Hunan’s Yueyang city also signed an agreement with a local rural bank to deploy the loans for those having financial difficulties to make the pension contributions.

The product is a “key innovation” to improve China’s multi-layer pension security system and effectively addresses the issue of insufficient paying capacity among mid-to-low income earners, according to the statement. BLOOMBERG