How is the reasonable pricing of bank loan problem was troubled for a long time. The pricing is too high, will drive customers to engage in high risk economic activity in order to cope with the heavy burden of debt, or inhibit the customer borrowing needs, to turn to other banks or through open market direct financing; pricing too low, banks can not realize the profit target, even can't compensate bank costs and risks. With many countries relaxation of financial regulation, loan market competition is becoming increasingly fierce, the loan pricing reasonable more important.
Generalized loan price including loan interest rates, loan commitment fees and service fees, prepayment or overdue fines, the main part of the loan price is the interest rate on the loan. In macroeconomic operation, the main factors affecting the loan interest rate level is the money supply conditions in credit markets. From the perspective of the micro level, in the actual operation of business loans, bank loans should be considered as the supply side is in many aspects. First, the banks with capital cost and operating cost of credit products. As mentioned before, the cost of capital is the historical average cost and marginal cost two different caliber, the latter is more appropriate as the basis for pricing loans. While the operating cost is the bank for the loan before the survey, analysis, evaluation and post loan monitoring the cost of direct or indirect costs. Second, the content of loan risk. Credit risk is an objective existence, but to different degrees, banks need to be based on the prediction of risk of loan to bear the risk of default claim compensation. Third, the duration of the loan. Applicable in different period of loan interest rates of different grades. The longer the duration of loans, liquidity is poor, and the trend of interest rate, the borrower's financial status, the more uncertain factors, the loan price should reflect the term risk premium is relatively high. Fourth, the target level of profitability of banks. In order to ensure the security of loans and the competitiveness of the market, the bank will make loans yield reached or above the target rate of return. Fifth, the competition of financial market. The bank should be compared with loan price level , as the bank loan pricing reference. Sixth, the overall relationship between bank and customer. Loans are usually support for maintaining customer relationship bank, the bank loan pricing should also be considered between the customer and the bank business relationship. Finally, the bank may require the borrower to maintain the balance of deposits, namely compensating balances, as the conditions attached to loans. Deposit balance compensating is actually a kind of implicit loan pricing, loan interest rate is between it and the trade-off. Banks in the comprehensive consideration of various factors, open issued several loan pricing methods, each method embodies the different pricing strategies.
Cost pricing method
This pricing method is relatively simple, assume that the loan interest rate consists of four parts: the loanable funds cost, non capital operating costs, the risk of default compensation costs (the cost of default), the expected profit, also in the cost of loans above certain spreads to determine lending rates, also called cost plus pricing method. The calculation formula of loan interest rates as:
Marginal cost + cost + loan interest rate = raise funds expected marginal cost plus the bank profit level compensation for default risk
Bank loans to accurately grasp the interest cost of funds and the level of operating costs is not easy, therefore, requires a careful design of the management information system. First, banks to marginal cost data collection of various debt funds, to calculate the weighted average marginal cost of all new debt funds, as the basis of loan pricing. Then, banks need to develop loan measurement system operation cost and decomposition method, the different positions of staff salaries and benefits, recurrent expenditure, equipment costs and other expenses apportioned to each loan business. In the calculation of the cost of default, bank loans can be divided into different risk levels, the average default rate and then calculate the loan according to the historical data, to determine the loan default risk compensation rate. Target profit for shareholders is the bank provide the required rate of return on capital and expected to achieve the loan profit rates.
Cost plus pricing method considering the cost of default loan financing costs, operating costs and customer, has certain rationality. However, this pricing method has its defects. All relevant costs it requires banks to accurately identify the loan business, is quite difficult in practice. Moreover, it does not take into account the market interest rate level and competitive factors, as a matter of fact, in the fierce competition, the price is not completely bank makers, but often is a price taker.
The benchmark interest rate pricing
The benchmark interest rate pricing method is the choice of the benchmark interest rate, banks add to a spread or by the last and into loan pricing method of coefficient. The benchmark interest rate can be a treasury bill rate, negotiable certificates of deposit interest rate, interbank lending rates, commercial paper rates and other money market interest rates, also can be the preferential lending rates, the lowest rate of silver quality customer issue short-term working capital loans. The common feature of these financial instruments or loan agreement is default risk is low, so their interest rates are often referred to as the risk free rate (Riskless Interest Rate), is the financial market common pricing reference, therefore, also known as the benchmark interest rate (Benchmark ). For the selected customers, banks often allows customers to choose the corresponding period of the benchmark interest rate as the basis of price, additional level of loan risk premium for different customer risk level.
According to the basic principle of the benchmark interest rate pricing, interest rate formula of bank loans to specific customers generally:
Term risk premium loan interest rate = benchmark interest rate + borrowers default risk premium and long-term loans
The formula after the two parts is in the benchmark interest rate based on the increase. The default risk premium can be set using a variety of risk adjustment methods, usually the risk premium is determined according to the loan risk rating. However, for higher risk customers, banks do not take simple approach for higher risk premium, because doing so will only make loans increased the risk of default. Therefore, in the face of higher risk customers, banks are to comply with credit rationing, the loan application to be rejected, in order to avoid risks. If the loan period is longer, banks also need to add the term risk premium.
In the past 70 years of the twentieth Century, Western banks in the use of the benchmark interest rate pricing method in common with preferential interest rates of banks as the loan pricing benchmark. Enter 70 age, owing to the increasing internationalization of banking, preferential interest rates as the dominant commercial loans benchmark interest rates by the London Interbank Offered Rate challenges, many banks have begun to use LIBOR as a benchmark interest rate. LIBOR provides a common pricing standards for banks, and provide reference for customers on the bank loan interest rates. In twentieth Century 80, appears below the benchmark interest rate of the loan pricing model. Because of the rapid rise of short-term commercial paper market, with foreign banks to close financing cost of lending interest rates, forcing many banks at preferential interest rates lower than the discount rate (usually a fairly low money market interest rate plus a small spread) loans to customers. However, loans to small and medium-sized customers still at preferential rates or other benchmark interest rate (such as LIBOR) as the pricing basis.
Customer profitability analysis
Customer profitability analysis (Customer Profitability Analysis, referred to as CPA) is a more complex loan pricing system complex, the main idea is that the loan pricing is actually a part of customer relationship overall pricing, the pricing of bank loan, the bank should consider giving with the client's comprehensive business relationship the costs and benefits. The basic framework of customer profitability analysis is to assess whether the overall bank earnings to obtain from a a specific client bank account in the bank to achieve profit targets, and therefore also known as account profit analysis. The bank will all income from the customer accounts to banks and all costs, as well as the bank profit is compared, then calculate how pricing. The formula is as follows:
Account of total revenue is greater than (less than, equal to the total cost + profit target) account
If the account to the total income is greater than the total cost account and target profit and, means that can produce the account earnings than the bank required minimum profit target. If the formula on both sides are equal, then the account just to meet bank fixed profit target. If the account is less than the total cost total revenue account and target profit and, there are two possible scenarios: one is income account is less than the cost, the account deficit; one is income account outweigh the costs, but the profit level lower than the bank profit target. In these two cases, banks are necessary to re pricing of loans, in order to achieve the set a profit target. Here introduced each elements of the composition and methods of calculation formula.
The total cost of 1 accounts
The total cost includes the cost of default account capital cost, all the service fees and management fees and loan. The marginal cost of cost of capital that banks provide the loan funds needed, used here is the marginal cost of debt. Service and management expenses include the customer account management fees, customer access to funds, to sign the check service fees, loan management costs (such as credit analysis, loan cost recovery fees and collateral maintenance costs) and other service charges. The cost of default is the bank loan risk measure similar estimated based on the average potential default loss.
The total income of 2 accounts
Total income including bank account interest income obtained from the customer's account of the investment savings investment income, scale and service fee income and on the customer's credit and other income. Among them, the customer account of the investment amount refers to the average customer deposits in the calculation period deduction collection is not up to the cash, the statutory deposit reserve after the residual value. The investment bank deposits, combined with some deposit rate of return, then calculate the customer deposits to the bank bring investment income. Service fee income is mainly the loan commitment fees, clearing fees etc..
3 target profit
Target profit refers to the capital requirements of the banks the lowest income obtained from each loan. Target profit according to the shareholders of target return bank fixed rate (capital of the target rate of return), loan allocation of capital (capital asset ratio) and the loan amount, the calculation formula is as follows:
Target profit = capital / total assets of the target rate of return * * capital loan
If the bank account profit analysis of loan pricing of new customers, need to predict customer account activity, based on the estimated total cost account and total income, evaluate the bank can also use this method to old customers have been lending price level. Generally speaking, if the account is net income is equal to the target profit, the loan pricing is reasonable; if the customer account net income is greater than or less than the target profit, banks should consider the adjustment of floating upward or downward adjustment to the loan pricing of the customers. The bank can also be used to raise or lower service price to play the role of adjusting loan pricing.

The cost profit pricing method
A total cost of all loans and loan pricing methods comparison of cost and management of expected return. It consists of three simple steps
All income 1 estimate loan will produce
2 Estimation of the actual use of the amount of money a borrower (minus the borrower commitment in bank holdings of deposits, plus reserve requirements
3 use the loan to income divided by borrowing from the actual use of the capital amount of loan pre tax earnings.

Preferential interest rate plus multiplication
In a preferential interest rate (determined by some big banks as capital weighted cost of itself) on the basis of the different risk grade borrowers (term risk and default risk) develop different loan interest rates. According to this approach, the loan interest rate pricing is the preferential interest rate plus a number or a number multiplied by.

Compensating balance is maintained by banks require borrowers loan quotas or the actual amount in the bank to borrow a certain percentage (usually 10% to 20%) the minimum balance calculation.
Compensatory balance help banks to reduce the loan risk, risk compensation could be; on the borrowing enterprises, compensating balance increases the real interest rate of loans, increase the company's interest burden.