HONG KONG, June 26 Reduced bank liquidity in China's onshore loan market is pushing up loan pricing as the country's banks try to curb lending after last week's credit crunch in the interbank market and stock market slump, loan bankers said on Wednesday.
Some Chinese state-owned and commercial banks have already asked borrowers to increase the interest margins of existing loans or renegotiate the margins on deals in the pipeline after the People's Bank of China (PBOC) said that the onus was on lenders to better manage their balance sheets.
"We will temporarily increase pricing of loans that haven't been drawn or fully drawn yet. It applies to all clients," a Beijing-based banker at a Chinese commercial bank said.
The policy change could push more Chinese companies into borrowing in the offshore loan market to access cheaper and more readily available funds, bankers said.
It could also affect Chinese banks' appetite for and ability to participate in syndicated loans for Asian companies.
China's money markets spiked last week after authorities allowed cash market conditions to tighten.
The average overnight Shanghai Interbank Offered Rate (SHIBOR), the average interbank lending rate offered by 18 Chinese commercial banks, rose to 13.4 percent last Thursday, while the one-week repo rate in China's money market climbed to 11.2 percent, the highest in 10 years.
One of China's "big four" state-owned banks - Agricultural Bank of China, Bank of China, China Construction Bank and Industrial & Commercial Bank of China - issued an internal note asking for higher margins on loans that had not been drawn yet immediately after last week's cash crunch, a Shanghai-based source at the bank.
Another major Chinese commercial bank asked all branches to only allow borrowers that agree to increase loan margins to 130-140 percent of the PBOC rate to draw funds in a video conference late last week, a source at the bank's Beijing branch said, a move which could cut smaller companies out of the market.
"Bigger companies need more funds and tend to agree with it, but the smaller ones will not draw funds at this time because they can't afford it," the Beijing-based commercial banker said.
Another loan banker at a city commercial bank said that the bank is only able to release funds to borrowers that pay more than 100 percent of the PBOC rate.
Bankers said that it is common practise for Chinese banks to prioritise deals with higher returns in times of reduced liquidity and that the increase in pricing is likely to be temporary until market conditions readjust.
"When liquidity is tight in the market, banks always give priority to those who pay higher margins," the source said. "This is when banks gain more bargaining power."
The change in policy means that small and mid-sized banks are likely to restrict lending and banks trying to limit credit will prioritise lending to companies with strong credit profiles over riskier firms, Moody's said in a report on June 24.
Money market fluctuations could also temporarily hit some foreign banks' ability to lend as they rely on China's interbank market for renminbi liquidity.
Toyota Motor Finance (China) Co Ltd recently postponed the drawdown date on its 1 billion renminbi dual-tranche revolving credit to early July from the end of June, sources said, adding that the delay could have been a result of banks' tightened liquidity.
"We suspect that some lenders might have problem providing the funds," another source said. (Editing by Tessa Walsh)