Deposit rates show signs of bottoming out

• AWNDR and AWNFDR record notable increases in January
• Two rates recorded 3.96% and 4.09% declines in 2020
• Banks on average pay 3% on savings accounts; NSB 3.5%
•  However, small biz lending rates continue to decline up to January

Deposit rates, which declined sharply throughout last year, appear to have ended their run, according to the latest available data for January 2021.

The average weighted new deposit rate (AWNDR) recorded 26 basis points (bps) increase in January from December 2020 levels to 5.19 percent, while the average weighted new fixed deposit rates (AWNFDR) climbed 22 bps to 5.30 percent. 

The two rates recorded 3.96 percent and 4.09 percent declines in 2020, as they came down with the lending rates in the economy. This phenomenon was evident from the compressed net interest margins of licensed banks, particularly in the final quarter of 2020.

Sharp and disproportionate fall in deposit rates to lending rates had bothered the Central Bank, which was conveyed to bank chiefs a number of occasions last year, as a many people depend on interest income on 
their savings.

Since the onset of the pandemic, high income earners stockpiled cash in their bank accounts, sending banks’ liquidity levels to their highest in recent times as lending dried up.

Depositors received a meager return on their savings, except for those who placed their deposits in senior citizen accounts up to a maximum of Rs.1.5 million. Senior citizens continue to get paid at 15 percent per annum under a special government scheme. Banks on average pay around 3.0 percent on savings accounts, while State-run National Savings Bank (NSB) pays 3.5 percent. 

Meanwhile, small business lending rates, broadly identified by the average weighted lending rate and the average weighted new lending rate, continued their decline in January 2021. 

The two average rates fell 12 bps and one bps to 10.17 percent and 8.37 percent respectively, by January-end. 
The Central Bank, referring to the recent bond market volatility said such development was unwarranted and did not reflect the broader market lending rates. 

Some analysts and economists expect an ending to the current low interest regime and see rise in interest rates as early as the second half of this year.