- Rates offered to prime borrowers have closely followed key policy rates
- But AWLR and new loan rates have more room to come down
An internal committee has been set by the Central Bank to expedite the monetary policy transmission through the real economy and to smoothen out any bottlenecks, as some delay is observed in passing down the full extent of the rate cuts, specially to small business loans.
While the rates offered to prime borrowers of banks—often referred to as the Average Weighted Prime Lending Rate (AWPLR)—has by and large closely followed the key policy rates adjustments made so far from the beginning of the year, the loan rates for small time borrowers have lagged behind.
The year-to-date drop in the AWPLR has been 146 basis points, closely in line with the 150 basis points cut in key policy rates by the Monetary Board before the Wednesday’s rate cut.
However, the Average Weighted New Lending Rate (AWNLR) and the Average Weighted Lending Rate (AWLR) have come down only by 112 basis points and 63 basis points respectively, and the Monetary Board is of the view that they have more room to come down.
The AWLR may not fully reflect the extent of the decline in the rates of the loans extended to small businesses during the last few months as the average rate is skewed to the large swaths of loans already at higher rates given prior to the crisis.
This is reflected from the new lending rate, which has responded faster than the AWLR as new loans have been granted at lower rates, although there is more room to decline.
Wednesday’s 100 basis point rate cut is aimed at accelerating this decline because authorities seek faster adjustment in market rates and faster deployment of loans to the small businesses—the thrust area of the government to fast track economic revival.
In the aftermath of the COVID pandemic, banks also have been coming up with loan schemes—often at less than 10 percent— either through raising foreign funds or allocating part of their low cost funds, as they also compete for a segment of high quality small businesses. In any case, the Central Bank believes that there could be a certain time lag before the full transmission of key rates to be reflected in market interest rates as the banks have contractual obligations such as borrowings and deposits to be met, which were obtained at higher rates prior to the aggressive easing cycle set in motion with the onset of the pandemic.
This makes banks’ funding cost higher than the new lending price, forcing them to incur losses if they do not match their assets with liabilities.
For instance, a one-year deposit taken at the beginning of the year costs the bank on average 10 percent, and the bank is contractually obligated to pay interest at that rate until the deposit matures by the end of this year.
However, the average new loan rate now has fallen towards little above the 10 percent level, which could lead to losses as there is an element of administration cost incurred by the banks, which also gets added when calculating the total funding cost of the loan for the bank.
On average, cost of funds in banks currently hovers around 8 to 9 percent.
This is why the Monetary Board launched the refinancing scheme to provide liquidity to banks at 1 percent so that in turn they could lend those funds at 4 percent to small businesses keeping a 3 percent margin.
The Monetary Board made available Rs.150 billion under the scheme and by last week the Central Bank had approved little over a third of the amount of the scheme earmarked to support businesses hit by the pandemic-induced shutdowns.