1. What are the major considerations for advancing the transition of the pricing benchmark of outstanding floating-rate loans to loan prime rate (LPR)?
The People’s Bank of China (PBC) officially released the announcement on the reform and improvement of the loan prime rate (LPR) formation mechanism on August 17, 2019. Currently, the LPR is the pricing reference for 90 percent of banks’ new loans. However, the pricing of outstanding floating-rate loans still refers to the benchmark lending rate, which cannot timely reflect changes in market interest rates or protect the rights and interests of both lenders and borrowers. To further deepen the LPR reform, the PBC issued the Announcement of the People’s Bank of China No. 30 [2019] to facilitate the smooth transition from benchmark lending rate to LPR for the pricing of outstanding floating-rate loans.
2. What are the principles for the transition?
First, borrowers can negotiate with banks to shift the pricing benchmark of their loans to either the LPR or fixed rates. They have only one chance to choose and shall not change afterwards. Outstanding floating-rate loans at the last repricing period may not experience the transition. Second, the transition shall start from March 1, 2020 and end before August 31, 2020 in principle. Third, the eventual lending rates will be determined upon negotiation between the lenders and the borrowers. Specifically, to implement the requirements of real estate regulation, interest rates of outstanding commercial individual housing loans shall remain unchanged at the point of transition.
3. How to shift the pricing benchmark of outstanding commercial individual housing loans from benchmark lending rate to the LPR?
Since the release of the announcement, banks shall formulate plans for the transition of pricing benchmark of outstanding commercial individual housing loans as soon as possible, including supporting system construction and personnel training, and inform the clients through multiple channels (including banks’ official websites and outlet announcements, short messages, emails, WAPs and phone calls). Contract terms shall be amended upon consensus of both parties as simply and feasibly as possible. For the loans whose pricing benchmark is to be shifted to the LPR, the LPR maturities will be determined according to the original loan terms, and remain unchanged throughout the remaining period of the contract. The basis points added, which could be negative, equal the spread between the current interest rate according to the original contract and the LPR in December 2019. Once determined, the basis points added shall remain unchanged during the remaining contract period. Interest rates of outstanding commercial individual housing loans will remain unchanged at the point of transition. Borrowers and lenders may agree on a new interest rate repricing period and date. Such repricing period shall be no shorter than one year.
The commercial individual housing loan can shift its pricing benchmark at any time between March and August 2020, whose basis points added are determined solely by the spread between the LPR in December 2019 and the current interest rate according to the original loan contract. To put it in another way, the basis points added will not be influenced by the time of transition during this period. Therefore, banks and their clients can properly advance the transition at any time reasonable. Currently, Most interest rate repricing period of outstanding commercial individual housing loans is one year and most repricing date is January 1 each year. Based on that, let me give you an example. You have eight years to go in your 20-year commercial individual housing loan. As stipulated in the original contract, the lending rate of loans with maturities over five years is 10 percent higher than the benchmark lending rate, so the current interest rate is 4.9%×(1+10%)=5.39%. Five-year-plus LPR in December 2019 is 4.8 percent. If the borrower and lender decide to shift the pricing benchmark on March 30, 2020, with the repricing period remaining at one year and the repricing date still on January 1 each year, the basis points added should be 0.59 percentage points (5.39%﹣4.8%=0.59%). From March 30 to December 31, 2020, the interest rate will remain at 5.39 percent (4.8%+0.59%). On the first repricing date after the transition, namely, January 1 2021, the interest rate will be adjusted to the five-year-plus LPR in December 2020 plus 0.59 percent according to newly-agreed repricing rules. The same rules will apply to the following years.
4. How to shift the pricing benchmark of outstanding loans other than commercial individual housing loans?
For outstanding floating-rate loans other than commercial individual housing loans such as corporate loans and individual consumer loans, both borrowers and lenders may, upon market-based negotiations, determine specific terms for the transition, including LPR maturities for reference, basis points added, repricing period and repricing date, or may choose to shift to a fixed interest rate.
