In recent years, the domestic housing market has started to boom thanks to the commercialization of the industry. Following the State's housing reform, people have chances to buy their own houses.

They take out mortgages with the banks and repay the loans by installment, generally over a period of 15 to 20 years.

But the Chinese are still not used to living with debt. If they can, they prefer to pay off their mortgages ahead of time. Advance repayment also saves them interest.

The decision by branches of eight major domestic banks in Shanghai to charge penalties for early repayment has thus stirred up hot criticism among house buyers. The banks hold that if mortgagors repay in advance, the banks will lose a considerable sum of interest income.

The banks' stance is understandable given the fact that they have to dig up more revenue and compete with much more powerful foreign rivals nowadays. With China's entry into the World Trade Organization, foreign banks have been allowed into the domestic market. Many of them have established branches in domestic financial centers.

Domestic banks have to adopt commercial strategies, and maximizing profit must become their top priority.

But they should not rush this change. It would be ill-advised for them to blindly follow the example of foreign banks that charge their customers such penalties in their home countries. Banking practices domestically and abroad are different.

Failure to take into account this difference will result in the loss of customers.

Foreign banks have a much longer history of operation. They have a fairly stable customer base. They also provide multi-level services that cater to the needs of different customers. The customers have more choices.

Domestic banks, however, have a shorter history of service operations. The urgent task for them is to develop a stable customer base and expand the market. They should not try to add to their revenue by charging penalties, even though they may be capital-strained.

The domestic housing market is growing very rapidly. If the banks charge penalties, mortgage customers will go to other banks and the banks will suffer loss of income.

Domestic banks cite international practices to defend their stance when starting to charge penalties. If they want to follow international practices in charging penalties, they should also follow international practices and improve their services.

Even in Beijing, for example, some branches of domestic banks still have customers queuing in long lines for service.

The financial products provided by domestic banks are considered inadequate. This is what the experts warn will frustrate domestic banks' efforts to compete with their foreign counterparts, which are famed for their comprehensive financial services.

The recent Ericsson example is a case in point. Mobile phone producer Ericsson early this year was reported to have repaid in advance its 1.99 billion yuan (US$240 million) debt to two domestic banks and borrowed the same amount of money from a foreign bank.

Experts said that Ericsson probably did so because of the better service and product offerings of foreign banks.

(China Daily June 10, 2002)