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Chinese banks tie some corporate loans to repo rates, margins pressured
Average net interest margin slipped to nearly 1.4% in Q1, well below the 1.8% level regulators have viewed as necessary for healthy capital growth.
Chinese commercial banks are beginning to price some corporate loans against short term interbank repo rates rather than the benchmark loan prime rate (LPR), a move that is drawing scrutiny as the sector already faces thin profitability, according to SCMP Economy.
Official data shows the industry’s average net interest margin, the spread between what banks earn on loans and pay on deposits, slid to nearly 1.4% in the first quarter. That is below a 1.8% threshold long regarded by regulators as necessary to support healthy, self funded capital growth.
Under the new approach, loans are pegged to depository institutional repo rates, specifically overnight and seven day interbank rates, which reflect banks’ actual funding costs in the open market. Market observers say broader adoption could further pressure margins in the near term, even as it may improve interest rate risk management over time.
Dong Ximiao, chief economist at Merchants Union Consumer Finance, warned that if a large volume of loans shifts to DR based pricing, loan yields could decline further and add pressure to net interest margins. He noted short term repo rates are well below the one year LPR of 3%, with overnight and seven day rates about 1.38% as of Wednesday, while arguing a multi benchmark system could allow more accurate risk pricing over time.