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BusinessBanking & Finance

Interest rate liberalisation in China to force banks to restructure: Citic

Citic Bank International says lenders will need to shift business strategy and manage balance sheets actively

PUBLISHED : Wednesday, 16 October, 2013, 12:15pm
UPDATED : Thursday, 17 October, 2013, 8:50pm

Interest rate liberalisation by Beijing will force mainland commercial banks to restructure, China Citic Bank International says, with the biggest impact to be felt by small and medium-sized banks as opposed to their bigger rivals.

The People's Bank of China announced on July 19 the removal of the floor on lending interest rates, signalling the liberalisation of lending rates on the mainland.

Interest rate liberalisation takes place when a government hands control of interest rates over to market forces.

"The next, more important step will be raising the deposit rates ceiling or scrapping the cap in a further liberalisation," Citic Bank's chief economist and general manager Liao Qun said in a report published yesterday.

That liberalisation would affect banks in two ways, Liao said.

First, allowing banks partial freedom to set interest rates on deposits and loans was likely to reduce the margin that banks earned from lending.

Banks would need to change their business strategy and expand into higher-margin products to maintain profits, which might increase the risk they take on.

Second, liberalisation would increase the volatility of interest rates, making it more difficult for banks to manage their balance sheets.

That would be significant for mainland commercial banks, Liao said. Smaller banks would be more vulnerable because of their less developed networks and branding, which might make it harder to expand into new business lines.

Large banks, in contrast, would be able to respond by transforming their business model and internal financial management.

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