PBOC to ease curbs on loan rates
Policy shift towards market-based mechanism may see end to floor for lending rates, giving banks more freedom to decide on margins
Beijing has drafted a plan to give banks more freedom in setting lending rates, taking a step further towards creating a new interest rate mechanism that can potentially eat into banks' profits.
Two sources familiar with the situation said the People's Bank of China might scrap the floor for lending rates by the end of the year, going by the draft plan.
Mainland banks are allowed to offer loans at rates of up to 70 per cent of the benchmark rates set by the central bank.
Under the new policy, rates can be set even lower, which in turn would lower the net interest margins - the difference between lending and deposit rates - of banks as they compete to undercut each other with cheap loans.
"The central bank is speeding up preparations for the reform," said one of the sources. "Basically, a market-based interest-rate mechanism will be in place if the floor lending rate is scrapped."
Mainland banks now enjoy high net interest margins because of the government's heavy regulation of the banking system that allows them to rake in easy profit on interest rate spreads.
The central bank is bent on pushing ahead with interest-rate liberalisation. A market-based interest mechanism could benefit depositors and borrowers as they can earn more interest and cut borrowing costs.