China's commercial lenders will charge a flexible interest rate on consumer housing loans according to their judgment of business risks and the debtors' situation.

"Banks now have more leeway in setting the housing mortgage rates and downpayments according to people's credit grades and the types of houses they are buying," said Guo Xiaolian, an official from the Beijing branch of China Minsheng Banking Corporation.

Three of the nation's four major state-owned banks unveiled their new loan rate standards yesterday after the central bank released its policy last Thursday to prohibit commercial lenders from lowering interest rates on consumer housing loans to below 0.9 percent of its benchmark rates.

According to sources at the Industrial and Commercial Bank of China (ICBC) and the Bank of China (BOC), people buying their first house will have to pay loans for five years or more at a rate of 5.51 percent, the bottom line of the new rate range. But for those buying additional houses, and high-end apartments or villas, the rate will be set at 6.12 percent, the central bank's benchmark rate, and the downpayment will be 30 percent or more.

But the China Construction Bank (CCB) set its rate on housing loans above five years at a benchmark rate of 6.12 percent, and for those buying "marketable" houses the rate will be lowered to 5.51 percent.

The joint-stock banks have also unveiled flexible housing loan rates.

"These banks got a good understanding of the central bank's new move and the flexible rate is a significant step forward to form a market-oriented lending culture," said Yang Qingli, an analyst at the research department of CITIC Securities.

"Instead of taking the lowest rate indiscriminately to occupy the market, the banks set their loan rates according to the clients' situation. These moves can effectively avoid hostile competition," she added.

But some analysts expressed concern on how the banks set the precise standards for the flexible rate and how consumers should apply.

"It is hard to implement the flexible rates. There is much that is unclear about the standards," commented Zhang Yan, an analyst at China Securities.

"For example, what is the definition of additional houses? Is it judged by purchases by individuals or families? And what is a high-end apartment?" she said.

Experts said the central bank's individual credit information database will work as a useful tool for commercial lenders to make decisions.

The database collects and keeps records of people's credit information such as credit cards, loans and guarantees. It is supposed to be a platform shared by all the commercial banks, but it has only been operational in seven major cities since the end of last year.

There are also some reservations about the CCB's 6.12 percent benchmark rate for housing loans.

"As one of the biggest lenders of consumer housing loans, the CCB will lose a large market portion by setting the rate at the 6.12 while its competitors such as the ICBC and BOC charge the bottom line rate," said Zhang Yan from China Securities.

Statistics indicated that the ICBC accounted for 25 percent of outstanding individual consumer loans by the end of 2003, while the BOC controlled 24 percent, the CCB held 22 percent and the Agricultural Bank of China had 16 percent.

Most consumer loans came from housing.

"If the CCB really starts to lose its market share in housing loans after the lending rate adjustment, it may reset the rate again to keep its clients," Zhang added.

(China Daily March 23, 2005)