(Yicai Global) June 24 -- Many Chinese commercial banks continue to lower the interest rates of consumer loans in order to lure quality individual customers, but such loans are raising concerns about their possible unlawful use in the real estate and stock markets.

Once the loans are issued, it is difficult to monitor how they are used, several insiders told Yicai Global. After the funds have exited the bank’s system, they can only be tracked by asking other banks for help.

This is raising concerns that such cheap loans are being used illicitly in the property and stock markets. Even though most of these loans are only valid for one year, with such low borrowing costs, the possibility of them being used to fund house purchases cannot be excluded, they said.

The Loan Prime Rate, set by the People’s Bank of China on the 20th of every month as the benchmark interest rate for lenders, has dropped by 40 basis points since last August, Nicholas Zhu, a vice president and senior analyst at US financial services company Moody’s, told Yicai Global. This reduction has gradually been passed down from corporate loans and personal mortgages to the market of consumer loans, he said.

“China Construction Bank is offering a one-year 'fast loan' with a relatively low interest rate of about 4.4 percent, down from 5.2 percent,” a customer who just applied for one told Yicai Global. “The repayment of both the interest and principal can be done at the same time on the expiration of the loan without any extra handling fees being added. This is rather cost-effective," he added.

So-called 'fast loans' are small credit loans ranging between CNY1,000 (USD141.33) and CNY300,000 (USD42,400) targeting individuals. The entire application can be done online through the China Construction Bank website and the approval process is fast.

Other large commercial banks, such as the Industrial and Commercial Bank of China and China Merchants Bank, have also downward revised the interest rates for their consumer loans. Smaller lenders are introducing cheap loan products too but are not able to match the discounts offered by the big banks.

Quality Clients

There are still relatively strict credit qualifications required of potential clients to be eligible for such low interest rate products. Banks have set up thresholds and will only accept clients of a certain financial scale.

“The importance of high-quality clients goes without saying," an employee responsible for individual loans at a state-owned bank told Yicai Global. Banks must still control asset quality. They do not want to be under pressure due to a 'lack of assets'.

By issuing cheap loans, banks are to some degree increasing the degree of attachment between themselves and their clients, another senior researcher in the banking sector said. This can help improve the quality of assets whilst maintaining clients. It is also beneficial to the expansion of their retail business.

The loan 'price war' is not rational, another insider told Yicai Global. Lenders still need to be prudent, taking both the cost of funding and risks into consideration, to keep the consumer loan interest rates from falling too low.

Editors: Tang Shihua, Kim Taylor