Loan Pricing Of Retail Bank In China

Credit loan is one of the most traditional and the key businesses of commercial banks, and loan pricing has significant influence towards not only the bank's profitability and its market competitiveness, but also the quality of bank's assets and the structure of customers. Therefore, how to develop an appropriate pricing model to price the loans is an important problem that commercial banks have been facing for many years. Similarly, owning advanced loan pricing technology or not is an important manifestation of the core competition abilities of retail banks.Started late, Chinese retail banking services are facing enormous opportunities and challenges from internal and external environments: on one hand, China's high economic growth promotes a rapid expansion of the size of the domestic middle class, which offer a broad market space for retail banking services; on the other hand, with the further liberalization of China's banking industry, Chinese retail banks will face strong competition of foreign banks. In my view, in order to win in such an environment filled with opportunities and challenges, Chinese retail banks should change the traditional management philosophy, take full consideration of the overall relationship between bank and its customers, the whole earnings from customers, and the risk factors, especially the risk of unexpected losses which Chinese commercial banks have long ignored. Hence, in this paper, we develop a loan pricing model based on customer value, which amended with customer lifetime value and economic capital.The logical structure, main ideas and conclusion of this paper are summarized as follows:Chapter 2^nd makes a review of domestic and international related literature of pricing models and researches, to find out that most of literatures are focus on the relationship between banks and firms (or companies), few analyzed the pricing problem of retail banking services, if had, most of the models were based on strong assumptions and therefore had poor applicability.Chapter 3^rd analyses current challenges and opportunities Chinese retail banking services faces. For one thing, that Chinese banking industry is changing from oligopoly to monopolistic competition making competition much fiercer; for another, the phenomena of the rapid expansion of the size of the domestic middle class and high-end customers having a say in pricing of loans bring both challenges and opportunities. Hence, Chinese retail banks need to take the initiative to cultivate and improve loan pricing mechanism for their overall competitiveness.Chapter 4^th summarizes the general principles: the pricing model is based on Credit Quotas Theory and Arbitrage Pricing Theory, and then focuses on the introduction of the Markov model of credit rating and the VaR (Value at Risk) methodology which is used to measure economic capital. Finally, we propose the basic pricing model based on contribution analysis and customer relationship, considering that banks should take full consideration of customer relationship in the long term.Chapter 5^th uses customer lifetime value to modify the pricing model. This chapter focuses on the analysis of customer lifetime value. After offering a clear definition of customer lifetime value, we analyze the influence factors in detail, then build a conceptual model of customer lifetime value, and suggest that the result of pricing model should be adjusted by the different types of customer lifetime value.Chapter 6^th studies the content and the role of economic capital management system in banking industry, which is an international commonly used system. Then we present an RAROC pricing model and make detailed introduction of each parameter as well as the methods for economic capital estimation. Finally, we add economic capital into the basic pricing model through RAROC, hence the remodified pricing model take full account of customer's overall contribution to the retail bank, the customer lifetime value, and the impact of economic capital.Chapter 7^th demonstrates an example to verify the pricing model of the paper using virtual data. It is shown that the conclusion of the example is consistent with the practice.Chapter 8^th puts forward a constructive proposal on how to improve the scientificity and competitive power of loan pricing focusing on bank reorganization and loan pricing mechanism improvement. We should combine the price strategies with the non-price strategies and pay more attention to the differentiation competition of banking products and service.