Loan Pricing Under Market-oriented Interest Rate Condition

With the slowdown in China’s economic growth, the gradual emergence of irrational industrial structure, resource allocation imbalances become one of the bottlenecks in the further development of China’s economy. Finance is the blood supply system of the economic growth, and the interest rate as the most important indicators of financial prices, is the key to promoting capital’s rational configuration. To further promotion of China’s financial system reform, and to dredge the channel of financial blood supply system, to stimulate the potential economic growth, china must break the long-term interest rate controls through market-oriented interest rates and suppress excess industries and backward industry funding requirements, which will help the limited funds allocated to more potential industries.In recent years, the reform of market-oriented interest rates gradually accelerates, and deposit and loan’s interest rate controls will be fully liberalized. The way commercial banks pricing the loans will thoroughly change. Loan pricing of commercial banks is a double-edged sword. On the one hand the bank will lose a steady interest rate spread income, and will face the fierce market competition. The traditional profit model will be completely broken. Banks can not rely on the enlargement of loan scale to maintain profit growth. On the other hand also banks will be forced to improve the capacity of loan pricing, to improve core competitiveness, which will help to improve the allocation of credit funds, and to reduce the risk of loans objectively. It will play an important role in enhancing the overall quality of China’s banking industry.In this situation, the way to make a scientific and rational price of loan, which ensure a certain degree of profitability, compensate the risk of loans, and maitain a certain advantage in the competition, is the key to respond quickly to changes in market interest rates and compete for the market share.The main objective of this paper is to study the method of loan pricing of commercial banks on the premise that the realization of market-oriented interest rates. First, the theoretical basis of foreign classic loan pricing and pricing models will be analyzed and compared to find out the advantages, disadvantages and scope of various pricing methods. Then the status and problems of China’s long-standing loan pricing will be analyzed. After the introduction of Risk-Adjusted Return On Capital models (RAROC model), the measurement principle of the model, ideas and pricing parameters will be analyzed. The study of expected loss and unexpected loss will be focused. Through a comprehensive consideration of enterprise’s micro factors and macroeconomic factors, the Logistic regression model for predicting the probability of default will be improved. With the financial data of publicly listed companies in the manufacturing sector and macroeconomic indicators, the improved Logistic regression models will be used to predict the probability of default. The expected loss rates will be derived based on probability of default. Combined with the Basel II, the unexpected loss rate will be derived. Finally we will get the formula of loan pricing based on RAROC model. Then we apply the formula to the actual loan case and compare the results of the theoretical price with the actual price to find out the differences between theoretical price and the actual price, and to demonstrate the effectiveness of RAROC models applied in the actual loan pricing case.