Small Loan Company Loan Pricing Based On Risk Adjusted Returns On Capital

With the continuous expansion of China’s demand for funds, the emerging microfinance companies began to emerge in the financial markets. Under the macroeconomic tightening policies, commercial banks began to tighten the money supply since the second half of2010, at the same time, due to the deregulation of the credit in the first two years, commercial banks have no money to loan. In this context, The Small and Medium Enterprises which support the national economy encounters shortage of funds, and is even more difficult to finance, however, small loan companies have lasted for more than four years, now have the opportunity to catch up. Small loan companies as a new thing, is in the preliminary stage of exploration. Then, small loan companies how to use the income to cover the cost, and to compensate for the loss? How to create a reasonable loan pricing system in order to maintain the current good momentum of development? These should be caused by the extensive attention of the theoretical and practical circles.This article first elaborates on the basic principles of several major loan pricing methods and compares the advantages, limitations and applicability of each method; Secondly, according to the characteristics of small loan companies and the main factor affected select the loan pricing method, then select the appropriate pricing model——the loan pricing model based on Risk Adjusted Return On Capital; then introduce each variable in the model, disassemble the complex ones for detail instructions, so as to achieve a detailed analysis of the entire model, and finally choose "A" small loan company as a case to demonstrate the loan pricing process of the small loan company through model calculations.The study found that to small loan companies, RAROC model is better to cover the credit risk of loans, and available to small loan companies. First of all, RAROC model’s core idea is to quantify the risk of loss that can be expected in the future as the current cost, to quantify the risk that cannot be identified and measured as the unexpected loss, take the unexpected loss of small loan companies fully into account, so the calculated loan prices can better compensate for the unexpected loss; Second, choose a representative small loan company "A" to analyze as a case, In order to guide a small loan company loan pricing, loan price estimated by the model comparing with the small loan companies’actual interest rates is lower, which indicate that the current interest rate level of small loan companies can achieve better profitability. However, this method has some limitations, such as imperfect credit rating, insufficient data information, imperfect risk considerations and so on, so against these limitations we give appropriate policy recommendations.