The Central Bank has raised the interest rate cap imposed on finance company deposits with effective from November 1, Mirror Business learns. To this end, the Central Bank has issued a circular to all licensed finance companies (LFCs) raising the hitherto prevailed 12.5 percent cap up to 13.5 percent. This is in response to the repeated requests made by the LFCs to increase the cap on interest rates offered on fixed deposits as they were finding it unable to compete for deposits with banks, which offer even higher rates than 12.5 percent.
However, the new development will now intensify the competition for deposits between the banks and LFCs. This has the potential to push up the interest rates further up. The upper limit of finance company deposit interest rates are linked to quarterly weighted average yield of 364-day treasury bills, on which an additional percentage point (between 3.0 to 5.5 percent) is charged based on the maturity period of the fixed deposit. This upper limit is calculated by the director of non-bank supervision unit of the Central Bank and is disseminated among the finance companies after the end of each quarter, in order to ensure the uniformity of the rate offered by all LFCs. Since the end of last year, the one-year treasury bill rate has risen by 294 basis points to 10.24 percent while the weighted average deposit rate and the weighted average fixed deposit rate have increased 159 basis points and 238 basis points, respectively, to 7.79 percent and 9.95 percent. There are 46 LFCs in the country with a Rs.481 billion deposit portfolio among them as of end 2015. Based on assets, the LFCs accounted for Rs.915 billion or 6.7 percent of the total financial system in the country. According to the latest data available, the banking sector has Rs.5,975 billion in deposits, which has grown by Rs.572 billion during the first nine months of 2016. While the banking sector asset growth or loans are mainly funded through deposits, LFCs fund their assets through both deposits and debt funds raised through funding lines and corporate bonds as they have a smaller deposit franchise compared to banks.