Rate cuts to have little impact on lenders

The move by the People's Bank of China to further free up deposit rates will have a limited impact on lenders and not trigger any sharp increases in deposit costs, economists said.

The central bank has removed the ceiling on bank rates for fixed deposits with terms ranging from two to five years starting Wednesday. The cap on demand deposits and other deposits with terms ranging from seven days to one year remains unchanged.

Previously, commercial banks offered deposit rates of 1.2 to 1.3 times the benchmark deposit rate, although the ceiling was 1.5 times the benchmark rate.

Lian Ping, chief economist at Bank of Communications Co Ltd, said: "Fixed deposits with terms ranging from two to five years accounted for less than one-third of all the deposits in China. The amount is fairly small compared with demand deposits, which accounted for more than 40 percent of all deposits. Therefore, the PBOC's latest step to further liberalize deposit rates will not cause any steep increases in the rates," Lian said.

Besides, the adjustment of deposit rates will take two to three years because banks can remove the rate ceiling only after the relevant deposits mature, he said.

"The central bank is likely to liberalize deposits with terms ranging from seven days to one year by the end of this year. But it will remain cautious about liberalizing demand deposit rates, because the move will increase the deposit costs of commercial banks by about 1 percentage point, worsen the banks' profitability and hike financing costs for domestic companies, especially small and medium-sized enterprises," he said.

Wen Bin, principal researcher at China Minsheng Banking Corp, said with the PBOC taking a further step to liberalize deposit rates, commercial banks will face greater challenges in terms of asset, liability and risk management.

"The removal of the ceiling on certain fixed-term deposit rates will force commercial banks to look for loan products with higher profits and controllable risks. It will also put the loan pricing ability of banks to test," he said.

To make up for the decline in profits caused by the narrowing of net interest margins, banks will make more efforts to develop intermediate and off-balance sheet businesses, such as investment banking, asset management, trade financing, supply chain financing, insurance, securities and the issuance of letters of guarantee.

"The banking industry is expected to transform into a diversified financial services sector with mixed operations, and this needs a major overhaul of the current regulations," Wen said.