Lending rates respond to policy rate hike as Average Weighted Prime Lending Rate crosses 6%

• AWPLR has risen by 30 bps since the policy rate increase
• New lending rates also seen rising even prior to the August rate hike
• However CB confident that current pace of private sector credit growth would remain

Market lending rates have began responding to the policy rate and banks’ reserves ratio hikes announced on August 19, as prime customers witness their loans becoming pricier for the third straight week as the benchmark rate climbed above 6.0 percent last week.  

The Average Weighted Prime Lending Rate (AWPLR), the rate at which banks lend to prime borrowers with higher credit ratings, rose by 7 basis points (bps) to end at 6.01 percent last week, marking the third consecutive weekly increase in the benchmark lending rate since Central Bank announced the rate hikes. 

This also marks the first time since November 13, 2020 the weekly AWPLR touched above 6.0 percent level. 
The Central Bank on August 19 raised its key policy rates by 50 bps and banks’ statutory reserves ratio by 200 bps effective from September 01, signalling the direction the rest of the lending and deposit rates should take. 

While overnight rates and government securities yields were the first to respond to the policy move, change in AWPLR provides a bellwether for the rest of the lending rates for loans, everything from mortgages to term loans to consumer loans. 

Since the policy rate increase, AWPLR has risen by 30 bps indicating that banks are gradually increasing their loan rate as liquidity runs dry in the money market. 

For instance, the overnight money market liquidity turned a deficit of Rs.181.72 billion in the week ended in September 03 from a surplus of Rs.13.26 billion as banks’ statutory reserves ratio hike went into effects on September 1, sucking around Rs.160 billion from the overnight market, as banks are now required to place 4.0 percent of their deposit liability at the Central Bank as a mandatory deposit requirement, up from an earlier 2.0 percent. 

Last year’s cut in the reserve ratio released Rs.180 billion in liquidity into the money market. 

This condition will naturally put pressure on banks to ramp up their deposit mobilisation efforts to maintain liquidity for their on-lending activities. 

Mirror Business earlier reported that banks were offering between 4.5 to 5.0 percent for their one-year fixed deposits, compared to 5.93 percent for a same tenor treasury bill. 

This would invariably urge banks to raise their deposit rates to remain attractive and also to maintain liquidity when the money market remains in deficit. 

However, the Central Bank announcing the monetary policy said it would inject liquidity at the overnight window should any deficits arise to ensure the money continues to flow into the needy segments of the economy.   

On September 03, some banks borrowed Rs.267.4 billion from the overnight window at the 6.0 percent Standing Lending Facility Rate (SLFR), while another section of banks which are well liquid deposited Rs.85.7 billion with the Central Bank at the 5.0 percent Standing Deposit Facility Rate (SDFR). Meanwhile, the new lending rates were also seen rising even prior to the August policy rate hike. For instance the Average Weighted New Lending Rate (AWNLR), the rate at which bank lend to small and medium businesses and other individual customers, rose by a sharp 62 bps in July to 8.09 percent from 7.47 percent in June. 

However, the Central Bank is confident that the current pace of private sector credit growth to remain through the year-end. But the extension of the payment holidays for the pandemic-affected borrowers and protracted lockdowns could make banks cautious in approving new lending facilities as they have already increased provisioning for possible loan losses due to the mounting toll on borrowers from the pandemic.