Tuesday 10 February 2009

Bankers Concerned About Marketized Interest Rates

Chinese banks stand to lose out on an easy source of income if the central bank stops setting interest rates.

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Guanyu said...

Bankers Concerned About Marketized Interest Rates

Chinese banks stand to lose out on an easy source of income if the central bank stops setting interest rates.

Wen Xiu, Caijing
9 February 2009

Indications from China’s central bank that interest rates will soon be set afloat on the market have Chinese commercial banks worrying about decreased earnings.

At an annual workshop in January, a representative from the People’s Bank of China, China’s central bank, proposed “steadily promoting the marketization of banking interest rates.” If this happens, it will pose a challenge to Chinese banks’ traditional reliance on interest income.

Currently, both lending and deposit rates in China are set by the central bank, leaving a gap between the two as high as 3.5 percent, the largest in the world. This affords an easy source of income for Chinese banks, which charge significantly more interest on loans made than they pay on their customers’ savings.

The chief of the corporate banking division of a large commercial bank said that if the market is allowed to decide wholesale lending rates, competition for customers will result in smaller margins between lending and deposit rates. This would take a chunk out of banks’ profitability, especially if these new rates are applied to the 30 trillion yuan of outstanding loans.

A report from the state-owned investment bank China International Capital Corp. came to the same conclusion, saying banks will suffer large earnings losses from a shrinking gap in lending and deposit rates.

Anticipation of the coming change may already be affecting the banking sector. Fears over smaller profit margins in the future contributed to the spate of new loans made in January, said the above banker.

However, another senior executive from a commercial bank said it is unlikely that the discussed marketization will happen in the near future.

A representative from the central bank told Caijing that in the long run, interest rates will become market-oriented. The transition will take place in stages: first with loans in foreign currencies and then with yuan, first with lending rates and then deposit rates, first with long-term large loans and then short-term small loans.

“The goal is to let the marketplace decide interest rates, so commercial banks must strengthen their ability in pricing risks,” the representative said.