A Study Of Loan Pricing Of Commercial Banks In China Based On Modified RAROC Model

Since starting in June 1996,the interest rate marketization reform in China has being promoted and completed.On October 23,2015,the People's Bank of China announced that no longer set the upper limit of floating deposit interest rates for the commercial banks and rural cooperative financial institutions,which means that China's market-oriented interest rate reform stepped forward again.With the advancement of interest rate marketization,commercial bank's interest spread narrowed gradually,which is the main source of bank's profit.At the same time,interbank market competition will become more intense.Therefore,commercial banks must segment credit market,offer professional and differentiated services to customers,to maintain profitability and competitiveness.Reasonable loan pricing is the key point to provide professional and differentiated service.By doing so,commercial banks could balance the risks and the earnings,meet customer demand,improve customer satisfaction and loyalty at the same time.At present,the commonly used loan pricing methods are Cost oriented pricing method,competition oriented pricing method,and demand oriented pricing method.They have shortcomings respectively,such as ignore the customer demand and competition factors,inaccurate subjective judgment,low popularization feasibility,etc.In recent years,the loan pricing based on RAROC(Risk Adjusted Return on Capital)has become an important tool for bank loan pricing in both practice and academia.RAROC model has been put to use in staff performance appraisal in commercial banks.Its usefulness in loan pricing is under exploring.Scholars have gotten some remarkable achievement on the theoretical basis,pricing process and the application of RAROC model,while the improvement of RAROC is still under discussion,especially related to the influence of customer relationship and credit have on loan price.Based on this,this paper added customer relationship as a variable to improve the traditional RAROC loan pricing model.The model was improved from four aspects,namely,the deposit derived profit,loan general income,intermediary business revenue and the cost for fun compensation.After the theoretical improvement,an empirical research was followed.This paper extracted 19 real loan data from a commercial bank in China,including loan amount,term,internal transfer price,etc.The results showed that the bank's real lending rate to the 19 customer were lower than the rate under improved RAROC model in average,which reflected a loan underpricing risk.In addition,the interest rate showed a significant difference between different customers under the improved RAROC pricing model,which required commercial banks to set the loan interest rate differently based on the customer's different credit terms and repayment capacity.Some suggestions of improving loan pricing risk prevention and profitability were put forward at the end of the article,which were expected to offer reference to relevant decisions of commercial banks and bank regulators.