China banks raise consumer loan rates to safeguard profit margins

Chinese banks recently started to raise consumer loan interest rates, just two weeks after they were slashed to record lows, underlining the challenges of lowering funding costs in the face of sustained pressure on profit margins. Lenders like China Merchants Bank Co. and Bank of Jiangsu Co., who had earlier conducted a price war by providing consumer loan rates of as low as 2.58% annually, have now increased their rates to at least 3% based on online promotions.

Large banks such as Industrial & Commercial Bank of China Ltd. and Agricultural Bank of China Ltd. are also to introduce the 3% floor rate from April, according to their advertisements. These rates were up to 10% just two years ago. It is not clear if the banks have been instructed by regulators to do this. The record-low lending rates threaten to further compress the banking sector's net interest margin, which fell to a record 1.52% at the end of last year. Authorities have called on banks to issue more personal consumer loans while making sure that the terms are fair, such as credit ceilings and interest rates.

BNP Paribas chief China economist Jacqueline Rong also proposed that regulators could have directed banks to increase consumer loan rates. "We think the authorities want to encourage fair credit risk pricing, particularly as the non-performing loan proportion of consumer loans has been increasing," she said.
This gap between consumer loan rates and prevailing mortgage rates might also encourage some borrowers to refinance their mortgages using lower-cost consumer loans, further damaging the banks' net interest income.

The consumer loan price war has meant that banks have to compete aggressively to draw in borrowers, with some referring to the competition as unhealthy. The success of these campaigns in stimulating consumption is questionable. Beijing is striving to drive consumer spending and boost domestic demand to minimize the nation's dependence on trade and exports. This has been difficult, though, since the end of the pandemic. Retail sales have lagged, and consumer prices fell into deflation in February for the first time in more than a year.