Small and Medium-Sized Banks' Fixed Deposit Rates Enter the "1" Era

Reporter Liu Ying

“Current fixed deposit interest rates are so low, but besides saving in fixed deposits, I don’t know what else to buy. I don’t trade stocks, nor buy gold, and I don’t want to buy insurance.” Since March, many depositors like Ms. Xin have been searching on social media for deposit products with interest rates above 2%.

Ms. Xin found that small and medium-sized banks, which previously attracted depositors with high-interest savings, have recently cut deposit rates, and high-yield products that were common before are now hard to find.

On the evening of March 11, Hubei Three Gorges Rural Commercial Bank announced a reduction in the interest rates of several deposit products. The bank stated that this adjustment was made in accordance with relevant interest rate management regulations and based on the bank’s actual operational conditions.

A bank manager from a rural commercial bank in western China told the Economic Observer that their bank’s deposit rates had already fallen below 2% across all terms by early 2026.

Hard to Find Deposits with Over 2% Interest

After searching for local high-yield deposit products, Ms. Xin finally deposited 100,000 yuan into a branch of Bank of Nanjing in Shanghai on March 5, opening a 3-year fixed deposit at an interest rate of 1.90%, with an expected interest of 5,700 yuan at maturity.

The continuous decline in deposit rates has not only changed depositors’ choices but also prompted customer managers at small and medium-sized banks to change their client acquisition strategies.

A customer manager from Weihai Bank’s Tianjin branch said that it has become more difficult to find deposit clients recently. When deposit rates were relatively high, their small and medium-sized bank had clear advantages, mostly relying on customers approaching them proactively. But now, many managers are recruiting deposits through social media.

After the Spring Festival, many small and medium-sized banks lowered deposit rates, covering regions such as Hubei, Yunnan, Xinjiang, and Jiangsu, with reductions ranging from 5 to 35 basis points.

On the evening of March 11, Hubei Three Gorges Rural Commercial Bank announced a reduction in the rates of several fixed deposit products. For example, their “Fuman Ying” fixed deposit product’s 1-year, 2-year, and 3-year annual interest rates were adjusted to 1.15%, 1.25%, and 1.55%, respectively, down 25, 25, and 30 basis points from previous levels.

Hami City Commercial Bank adjusted deposit rates starting March 10. Compared to the rates on May 30, 2025, the 1-year, 2-year, and 3-year deposit rates were all lowered by 20 basis points, and the 5-year deposit rate was cut by 25 basis points. Xinjiang Bank also lowered deposit rates on March 10, affecting all fixed deposit products, with the largest cut of 15 basis points for 5-year deposits.

Notably, some small and medium-sized banks’ adjusted fixed deposit rates have shown an “inversion” phenomenon. For example, Heilongjiang Youyi Rural Commercial Bank adjusted rates from March 1, 2026, with 3-year and 5-year deposits at 1.75% and 1.60%, respectively.

Jiang Han, senior researcher at Pangu Think Tank, told the Economic Observer that the fundamental driver is the macro monetary policy orientation. To support the recovery of the real economy, the central bank has continued to implement reserve requirement ratio cuts and interest rate reductions, with policy rates lowered multiple times, guiding market liquidity to be reasonably ample. As the end of the interest rate transmission mechanism, deposit rates at small and medium-sized banks inevitably follow the decline of policy rates to reduce overall social financing costs. Additionally, the narrowing of banks’ net interest margins to historic lows forces reforms on liabilities. Amid declining yields on assets, small and medium-sized banks can only significantly cut deposit costs—the main source of liabilities—to maintain basic profitability and risk absorption capacity.

Jiang Han said that the trend toward fixed-term deposits has increased cost pressures. In recent years, residents’ precautionary savings intentions have strengthened, and the proportion of long-term high-interest deposits has risen, causing rigid increases in banks’ liability costs. By lowering long-term interest rates and even causing rate inversion, small and medium-sized banks aim to optimize deposit maturity structures, curb irrational “high-interest deposit grabbing” competition, and adapt to the new normal of asset-liability management in a low-interest-rate environment.

How Will the Interest Spread Evolve?

The bank manager from the rural commercial bank mentioned earlier said that their bank mainly serves local farmers and residents in county towns, with limited deposit volume. The rate cuts are unlikely to significantly impact overall deposits. However, a major challenge for the bank is fierce competition in the region, which includes Agricultural Bank, China Construction Bank, Postal Savings Bank, and local city commercial banks.

This manager admitted that it will be difficult for the bank’s interest margin to stabilize in 2026. Cost reduction and efficiency improvement remain the core focus for the year, mainly through strict budget management, lowering cost-to-income ratios, and expanding revenue channels.

From a single rate cut to industry-wide liability cost control, from passive interest rate concessions to proactive transformation, the operating logic of small and medium-sized banks is changing. As liabilities continue to be adjusted, when will the net interest margin bottom out, and how to break through in the future, are key market concerns.

The “Development Report of Small and Medium-sized Banks (2025)” published by the Shanghai Financial and Development Laboratory shows that the deposit interest payment rate of listed banks has entered a downward channel since mid-2024, with a trend of slowing then accelerating. Small and medium-sized banks have been more aggressive in controlling liability costs, with city commercial banks’ interest payment rates decreasing by an average of 25.7 basis points, and rural commercial banks by 24.4 basis points.

This is driven by both price and structural factors: reductions in executed and listed interest rates, strengthened self-regulation mechanisms, and convergence of manual interest payments have collectively pushed deposit rates downward; the structure of fixed deposit terms has shifted from longer to shorter, with some medium- and long-term deposits maturing and being repriced, further lowering overall interest costs.

Regarding operational costs, the report shows that the cost-to-income ratio of small and medium-sized banks has turned negative year-on-year, reflecting strategic adjustments such as cost control and channel and process optimization. Since Q1 2024, rural commercial banks have maintained a negative ratio, still at -0.38 in Q3 2025; city commercial banks also turned negative from Q1 2024, with further declines in 2025. This indicates that, amid revenue growth pressures, small and medium-sized banks have effectively controlled operating costs through branch optimization, staff reduction, and digital transformation.

Jiang Han explained that the narrowing interest spread results from faster declines in asset yields compared to the reduction in liability costs. Although deposit rates have fallen into the “1” range, the re-pricing of existing mortgages, continuous declines in the Loan Prime Rate, and insufficient effective credit demand have caused loan yields to fall more sharply. Moreover, in 2026, a large wave of fixed deposits maturing will challenge banks’ ability to retain customers, as the actual interest costs paid are sticky and rigid downward, leading to slow recovery of the interest spread.

He believes that there is still room for further narrowing of the interest spread for small and medium-sized banks, but the pace will slow. With the deepening of interest rate marketization and ongoing support policies for the real economy, loan interest rates are unlikely to bottom out soon; simultaneously, the global low-interest environment limits how far deposit rates can fall. He expects the industry’s net interest margin to hover at low levels until a new equilibrium is reached.

He also mentioned that small and medium-sized banks need to shift from “scale-driven” to “specialized and lightweight” development. First, they should deepen local differentiation, focusing on inclusive micro, small, and microfinance, green finance, and other niche areas, improving risk pricing to achieve higher asset yields. Second, they should vigorously develop non-interest income, expanding wealth management, investment banking, consulting, and other intermediary businesses to reduce reliance on interest rate spreads. Third, they should strengthen digital operations, using technology to lower operating costs and hedge the profitability pressures caused by narrowing interest spreads.