Chinese banks increase consumer loan rates from record low amid pressure on margins

Chinese banks have begun raising consumer loan interest rates just about two weeks after cutting them to record lows, underscoring the challenges of lowering funding costs amid sustained pressure on margins.

Lenders including China Merchants Bank and Bank of Jiangsu, which previously engaged in a price war by offering consumer loan rates as low as 2.58 per cent annually, have now adjusted their rates to no less than 3 per cent, according to online advertisements.

Major banks such as Industrial and Commercial Bank of China and Agricultural Bank of China will also implement the 3 per cent floor rate starting in April, according to the advertisements. These rates were as high as 10 per cent about two years ago.

It remains unclear whether banks received guidance from regulators to make the shift. The record-low loan rates risk further squeezing the sector’s net interest margin, which hit a rock bottom of 1.52 per cent at the end of last year. Banks have been urged to expand the issuance of personal consumer loans while ensuring reasonable terms including credit limits and interest rates.

Jacqueline Rong, chief China economist at BNP Paribas, said authorities might have instructed the banks to lift consumer loan rates. “We think regulators aim to promote the fair pricing of credit risk, given the non-performing loan ratio of consumer loans have been picking up.”