The Research On Loan Pricing For SMEs In China Based On RAROC

Loan pricing is that the commercial banks confirm the rate by analyzing theborrowers’credit,the cost of capital,risk and profit to match its principals such asbeing safe,profitable and liquidity.With the process of rate marketization,the abilityto price is facing great challenges.Loan for small and medium enterprises isbecoming more and more important for the commercial banks to swift theirstrategy.The commercial banks put more and more capital in credit forSMES.So,establishing an efficient pricing model for SMES is of greatsignificance.The thesis uses five parts to illustrate the choice of pricing model forSMES.Chapter1states the background and significance of topics and the researchresults about loan pricing at home and abroad.The thesis uses research methodsincluding qualitative Research and quantitative research,theoretical research andempirical research.Chapter2introduces the rate marketization what Chinese banks are facingwith,and what the rate marketization bings about,including challenges andopportunities.So it’s urgent for Chinese commercial banks to establish a suitablepricing model for SMES.Chapter3puts forward with the problems hiding in loan pricing at present,suchas pricing model being unreasonable,credit rating not being used in pricing,ignoringthe difference between sectors and regions.Then,this chapter analyses what restrictsthe development of loan pricing in China.That are lack of effective benchmarkinterest rate and relevant data,secondary market of loan being not perfect and thesystem of interest rate being twisted. Chapter4is one of the most important chapters in this thesis.In this chapter,Iintroduce several traditional pricing models including cost-plus method,priceleadership model,custom profitability analysis and option valuation model.Then thethesis elaborates the theory of RAROC,the formula and the key factors of thismodel.By comprising,I find that the RAROC is suitable for SMES loan pricing inChina.The model has many advantages,which are:economic capital dilutes theunexpected loss brought in by loan for SMES.Risk adjustment function makesRAROC more accurate in calculating the profit and matching the risk and profit.Thismodel can solve the problems existing in Chinese banks,such as adverse selectionand credit rationing.What’s more,RAROC is good for performance appraisal.In chapter5,I put the client value into the formula of RAROC to make the loanrate more competitive and customer-oriented.I use the database of25SMS tocalculate an analog loan rate.The result proves that there is great difference betweenthe analog rate and the rate practically executed.And the analog rate is more flexiblethan the current rate used by commercial banks.The former reflects the venture-return and customer-oriented model.Based on the above analysis,I put forward withseveral suggestions on loan pricing for SMES:to establish FTP,to allocate economiccapital to SMES loan,to make the most use of credit rating and to calculate thecustom profitability in loan pricing.All of these are useful for commercial banks andSMES.