May 16, 2019 08:34 PM

In Depth: Banks Go to War to Meet Beijing’s Goal of Lowering Rates for Small Businesses

Customers get service at bank counters in a branch of Agricultural Bank of China in Qingdao, East China's Shandong province, on May 21. Photo: IC Photo
Customers get service at bank counters in a branch of Agricultural Bank of China in Qingdao, East China's Shandong province, on May 21. Photo: IC Photo

A price war has broken out among banks competing to offer the lowest rates on loans to small businesses as the government has made supporting these companies a greater priority since last year.

The price war among lenders is just one of several side effects of a government drive to lower funding costs for small businesses, which has also ratcheted up the competitive pressure on smaller lenders and sparked concerns that companies receiving low-rate loans could abuse their privilege by relending the cheap funds at higher rates.

Local branches of the China Banking and Insurance Regulatory Commission (CBIRC) across the country have been guiding banks to bring down financing costs for small enterprises, Caixin has learned.

In the first quarter this year, the overall banking sector’s average interest rate on loans to small businesses — defined as companies with credit lines under 10 million yuan ($1.5 million) — dropped to 6.87% from 7.39% for the whole of 2018, Zhu Shumin, a vice chairman of the CBIRC, said at a briefing in Beijing last month.

During the same period, the average interest rate that the “Big Five” state-owned commercial banks offered to the small businesses was 4.76%, down from 4.89% for the fourth quarter last year, according to Zhu. The rate is closer to the one-year benchmark lending rate set by the People’s Bank of China, which has remained at 4.35% since October 2015.

As for the risk banks face, Li Junfeng, director of the CBIRC’s Financial Inclusion Affairs Department, said at the briefing that the banking regulator doesn’t encourage banks to set lending rates for small enterprises below the benchmark rate. He estimated that if banks can control risks with a nonperforming loan (NPL) ratio of less than 3%, their interest rates should be set between 5% and 5.7% to break even.

Li also pointed out that if a bank sets the interest rate too low, it might give an incentive to companies to relend the cheap funds at a higher rate to hard-up borrowers, earning an easy, tidy profit for themselves.

Multiple bankers have told Caixin that they believe Industrial and Commercial Bank of China Ltd. (ICBC), one of the Big Five, was the first to lower its interest rate on these small business loans, setting off a price war among banks. In the fourth quarter of 2018, it offered an average rate of 4.5% (link in Chinese) to small companies, while Bank of China Ltd. and China Construction Bank Corp. offered average rates of 4.79% (link in Chinese) and 5.29% (link in Chinese), respectively.

This price war has been driven by a series of government policies that aim to support small enterprises. During the national legislature’s annual session in March, Premier Li Keqiang promised that the country will lower financing costs for small businesses this year by 1 percentage point from last year.

Since October, policymakers have issued a multitude of policies designed to aid the struggling private sector and small businesses, including tax and fee cuts. The central bank has lowered the percentage of funds that banks must hold in reserve, in an effort to spur lending. The CBIRC also announced in January that it will tolerate higher NPL ratios for rural commercial banks’ loans to small businesses.

As a result, the amount of outstanding loans to small businesses at China’s five largest state lenders rose to 1.99 trillion yuan at the end of March, up nearly 17% from the end of 2018, according to Zhu.

However, a price war over these loans could impose a greater burden on other bank departments, which need to help offset losses in revenue from these low-priced loans. An ICBC branch president told Caixin that the branch has significantly cut the interest rate on loans to small businesses since last year to fulfill government expectations, and that its higher-level branches have had to make up for its loss.

In addition, urban and rural commercial banks have come under greater pressure from the competition.

“Our better clients have been lured away by the big banks with lower interest rates,” a person in charge of a rural bank’s small business lending department told Caixin, adding that big banks like these low-risk clients. “The better clients are, the better they are at calculating. They can figure out the difference in the rates offered by us and the big banks, and are unwilling to pay more just because we offer a better service.”

A source from Zhejiang Linhai Rural Commercial Bank Co. Ltd. in the eastern province of Zhejiang told Caixin that it has come under pressure from the competition and it will make preserving market share a priority over its profit margin.

In the short term, banks can quickly provide capital to small companies to meet government demands, but from the lenders’ perspective, this kind of loan businesses will depend heavily on other bank departments to offset the loss, said Bei Duoguang, president of the Chinese Academy of Financial Inclusion at Renmin University of China.

It could also have other side effects as well. Broadly speaking, the influx of low-cost funds has disrupted the market, crowding out loans that follow the real market pricing mechanism, Bei told Caixin.

Hu Yue contributed to this report.

Contact reporter Timmy Shen (

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