Loan Pricing Of Commercial Banks

A sound and efficient banking system is critically important to a nation's economy. Commercial banks play an important role as financial intermediary in funding economic growth. Banks have traditionally performed the important function of intermediating between lenders and borrowers by using liquid, short-term liabilities to fund relatively long-term and illiquid assets. They acquire funds from interest-earning assets– predominantly loans, which provide the bulk of revenue and enable them to cover expenses and earn a profit. Pricing of interest rate on loan assets is therefore a crucial element in the loan portfolio asset management of commercial banks.Unlike developed countries that have well-established financial markets to facilitate the flow of funds, China had long been under the planned economy. Pampered by virtual government guarantees for years, local commercial banks are hardly"genuine"financial intermediaries that play the functions in efficiently intermediating funds. The regulated RMB loan interest rates within a narrow bandwidth can hardly price in the relationship between lenders and borrowers and various risk variables which should have been reflected in the market oriented commercial banking world.The deregulation of domestic interest rates is believed to be an attempt to prepare domestic banks for the expected intensive competition from foreign banks after the entry of WTO, and to seek full integration between the domestic and international capital markets. The plan to deregulate RMB interest rate is a logical move to allow banks to price loans according to risk assessment as well as the bank-borrower relationship which are vital to the healthy development of commercial banks.