Small and medium-sized banks have collectively cut deposit rates, with further declines likely in the future.

　　Since April, small and medium-sized banks in multiple provinces, including Guangdong, Hubei, Shaanxi, and Henan, have successively issued announcements lowering their posted RMB deposit rates, covering demand deposits, time deposits, and large-denomination certificates of deposit, with adjustment magnitudes varying across different maturity terms.

　　Experts interviewed by the Economic Information Daily noted that, since last year, amid an overall decline in market interest rates, major state-owned banks and several joint-stock banks have successively lowered deposit rates. This latest adjustment can be seen as a “follow-up” by medium- and small-sized banks, reflecting their market‑driven pricing strategy to reduce funding costs. The experts cautioned that there is still room for deposit rates to fall in the future, and urged the general public to assess the trade‑off between returns and risks based on their individual needs and to pursue diversified asset allocation.

　　 The degree of pitch reduction varies.

　　Guangdong Nanyue Bank announced on its official website that, effective April 4, it will lower the interest rate on demand deposits from 0.385% to 0.3%, and reduce fixed-term deposit rates by 2 to 15 basis points. Meanwhile, Henan Xincai Rural Commercial Bank stated that, starting April 8, the posted interest rates for one-year, two-year, and three-year fixed-term deposits will be cut from 2.25%, 2.70%, and 3.30%, respectively, back to 1.9%, 2.4%, and 2.85%, while rates for other maturities will remain unchanged.

　　In addition, numerous banks across Hubei, Shaanxi, Inner Mongolia, and other regions have announced cuts to deposit rates, with the magnitude of the reductions varying. Several small and medium-sized banks, including Wuxue Rural Commercial Bank in Hubei, Huangmei Rural Commercial Bank in Hubei, and Kundulun Mengyin Rural Bank in Inner Mongolia, have mostly lowered rates by between 2 and 20 basis points.

　　Industry insiders believe that this round of deposit-rate cuts by medium- and small-sized banks is a continuation of the rate reductions implemented last September by state-owned major banks and certain joint-stock banks, and also underscores the pivotal role played by the market-based deposit-rate adjustment mechanism established last year.

　　In April 2022, the People’s Bank of China guided the Self‑Regulatory Mechanism for Interest Rates in establishing a market‑based adjustment mechanism for deposit rates. Under this framework, member banks adjust deposit rates appropriately, taking into account bond market rates—represented by the yield on 10-year government bonds—and loan market rates—represented by the one-year LPR. Against the backdrop of an overall decline in market interest rates, banks’ reductions in deposit rates are precisely in line with the intended purpose of this mechanism.

　　Dong Ximiao, chief researcher at China Merchants Bank, cautions that for individual households, if their asset allocation includes a substantial share of medium- and long-term deposits, yields may decline. Households should strike an appropriate balance between risk and return and allocate their assets prudently.

　　 Restraining irrational competition

　　Industry insiders generally believe that this adjustment to deposit rates will help reduce the funding costs of small and medium-sized banks and is also one of the measures they are taking to meet the requirements of the self-regulatory assessment mechanism for interest-rate pricing.

　　“Last year, major banks and joint-stock banks cut deposit rates, prompting some deposits to shift to smaller and medium-sized banks. While this broadened the deposit base of these smaller institutions, it also increased their funding costs. The recent rate cuts by these banks have been concentrated on medium- and long-term deposits, which carry higher interest rates; reducing these rates helps lower their liability costs,” said Lou Feipeng, a researcher at China Postal Savings Bank.

　　Ren Tao, a specially appointed researcher at the National Financial and Development Laboratory, noted that small and medium-sized banks missed last year’s window for adjusting deposit rates downward, and that some institutions had previously leveraged special occasions such as the Spring Festival holiday—along with tailored deposit products and marketing tactics—to launch “strong‑start” campaigns. As a result, their deposit rates have diverged significantly from market levels. “This round of adjustments can help correct that divergence to a certain extent.”

　　In fact, in April this year, the Self-Discipline Mechanism for Interest Rate Pricing issued the “Measures for Implementing Qualified and Prudent Assessment (2023 Revised Edition)” (hereinafter referred to as the “Measures”), which added a new indicator—“the degree of market-based pricing of deposit rates.” “In recent years, regulatory authorities have placed particular emphasis on commercial banks’ market‑based pricing practices. The newly released Measures also incorporate ‘the extent of market‑based pricing of deposit rates’ as a deduction item within the assessment framework, imposing more stringent requirements on the appropriate magnitude of deposit‑rate adjustments. This has prompted some small and medium‑sized banks that had previously failed to adjust their deposit rates adequately to lower rates in order to meet the assessment criteria,” said Ren Tao.

　　Dong Ximiao believes that this adjustment to deposit rates will curb banks’ irrational competition for deposits, address the “scale obsession” and “speed-driven impulses” in their liability‑side operations, enhance the stability and sustainability of their development, and better safeguard against financial risks.

　　 There is room to lower medium- and long-term fixed-deposit interest rates.

　　How much room is there for deposit rates to fall in the future?

　　Lou Feipeng said that the likelihood of further declines in deposit rates is relatively high, and in this process, medium- and long-term fixed‑deposit rates are likely to see greater room for reduction compared with demand deposits.

　　“The decline in medium- and long-term deposit rates helps narrow the yield spread between short-term and medium- to long-term deposits, curbs arbitrage activities, and promotes a more balanced maturity structure of bank deposits,” said Dong Ximiao.

　　Ren Tao stated that, based on the newly issued Measures and the latest net interest margins of various types of banks, the net interest margins of all commercial banks, major state-owned banks, joint-stock banks, city commercial banks, and rural commercial banks have now fallen to 1.91%, 1.90%, 1.67%, and 2.10%, respectively, leaving increasingly limited room for further margin expansion. “Going forward, the downward trajectory of deposit rates should broadly align with the extent to which net interest margins narrow and loan rates decline; overall, local banks are likely to see larger reductions in deposit rates.”

　　In his view, the narrowing of net interest margins poses a significant challenge for commercial banks, both in the near term and over the longer haul, requiring them to mount an effective response. “On the liability side, banks must continue to strengthen internal management, expand low-cost deposit‑generation channels, diversify their funding base, uphold the central role of core low‑cost deposits, tighten control over the volume and pricing of higher‑cost deposits, and refine deposit‑pricing practices. On the asset side, they should keep enhancing their capabilities in broad‑category asset allocation, maintain steady growth in credit volumes, moderately increase allocations to retail assets, bond investments, and high‑yield interbank assets, and boost clients’ overall returns through integrated financial services,” said Ren Tao.

　　Lou Feipeng stated that banks should enhance their fee‑based income by strengthening payment and settlement services, thereby reducing their reliance on interest income. (Reporter Zhang Mo, Intern Yang Lewen)

[Editor-in-charge: Jiao Peng]

Source: Economic Information Daily