China’s central bank to use LPR for pricing existing floating-rate loans

China’s central bank on Saturday announced it would use the loan prime rate (LPR) as a new benchmark for pricing existing floating-rate loans.
Starting from January 1, financial institutions in China will be banned from signing floating-rate loan contracts based on the previous benchmark bank lending rate, the People’s Bank of China (PBOC) said in a statement.
Floating-rate loans, excluding individual housing loans tied to state provident funds, that have been signed before 2020 will be priced in accordance with the LPR, the Chinese central bank added.
From March 1, financial institutions in China will negotiate with customers on terms for converting the pricing benchmark on their loan contracts into the LPR, the statement said.
The converted lending rate on the existing commercial individual housing loans shall remain unchanged, aiming to carry out the government’s property regulations, it added.
In August, the central bank commenced using the revamped LPR as a new benchmark for pricing new loans, in an attempt to steer borrowing costs lower to back the slowing economy.
Around 90 percent of new loans are benchmarked against the LPR. Yet, the existing floating rate loans are still priced based on the previous benchmark lending rate, which “cannot reflect the changes of market interest rate in a timely way”, the PBOC statement read.
The one-year loan prime rate (LPR) stands at 4.15 percent while the five-year LPR at 4.80 percent.
Source: Reuters