Prime lending rate falls below 6% for first time in recent history

• AWPLR touched 5.72% last week; YTD fall estimated at 4.12%
• AWNLR rate also falls in lockstep, logging 4% decline up to end-Sept.
• Both big biz and small biz now get lowest rates in recent history 
• Monetary policy efficacy at its highest as key policy rates cut by only 250 bps

The prime lending rate fell by a steeper 79 basis points (bps) last week, pulling the benchmark rate below 6.0 percent for the first time in recent history after the Monetary Board decided to keep policy rates unchanged last Thursday, while reiterating its commitment towards a dovish monetary policy.

The average weighted prime lending rate (AWPLR) or the rate at which banks price their loans to their prime customers—mostly on loans for short tenors— fell to 5.72 percent last week from 6.51 percent in the previous week. 

The AWPLR fell to 6.25 percent on September 18, touching its recent lowest on record for the first time since January 2015 and last week’s fall brought the benchmark rate into completely new territory. 

Last week’s fall brought the cumulative AWPLR fall to 412 bps or 4.12 percent so far this year, the most in a shortest span. 

This is in comparison to the 250 bps point cut in key policy rates for four times this year to support the economy to rebound from the pandemic-induced shock in March and April. 

Along with the AWPLR slump, a similar decline was observed in the new lending rates in the economy, which commonly captures the rates offered by banks predominantly on micro and small business loans. 

The average weighted new lending rate (AWNLR), which is reported roughly with a three week’s lag in comparison to the AWPLR—which is calculated and reported every week— fell by 30 bps in September to 8.82 percent. This rate has so far declined by 398 bps or nearly 4.0 percent from January through end-September, logging once again the most decline in a shortest possible time. 

AWNLR is often used as an instrument to gauge the rates offered on loans to the economy’s priority sectors such as micro and small businesses and the self-employed. 

Such loans gathered steam after a Central Bank sponsored re-finance scheme pumped in Rs.178 billion afresh as loans, some with credit guarantees at 4.0 percent interest rate. 

This condition reflects the efficiency of the monetary policy transmission mechanism as of late compared to the lagging effect between monetary policy action and market rates in the past.

Meanwhile, the average weighted lending rate (AWLR) or the average rate of all loans outstanding in the banking system, fell to 11.21 percent by end-September, bringing the cumulative fall in the rate to 238 bps or 2.38 percent during the nine months. 

In quite an unusual event, Sri Lanka’s six-month and one-year Treasury bill yields at the primary auction held last week, ahead of the monetary policy decision, fell below the floor policy rate of 4.5 percent. 

Sri Lanka’s Public Debt Department offered Rs.40 billion worth bills under three tenors—Rs.4.0 billion under one-month and Rs.18 billion each under six months and one year tenors. The PDD accepted Rs.14.7 billion from six-month bills and Rs.25.3 billion from one-year bills at rates of 3.87 percent and 4.13 percent, respectively compared to 4.71 percent and 4.99 percent at the previous auction.

Further decline in rates expected amid excess liquidity

While lending rates have already responded fast to policy rate cuts, the Monetary Board expects those rates to further ease in the coming weeks and months as excess liquidity in the money markets surged through last week as banks parked their excess funds at the floor policy rate with Central Bank. 

According to latest data, excess liquidity in the money market shot up by Rs.32.4 billion to Rs.207.92 billion as at October 20, a day before the Monetary Board met, as banks increased their deposits held under Central Bank’s Standing Deposit Facility Rate (SDFR).

SDFR is the rate at which the excess liquidity of the banking system is absorbed by the Central Bank while the Standing Lending Facility Rate (SLFR) is used to pump money back into the banking system. 

The Monetary Board last week left the SDFR at 4.5 percent and the SLFR at 5.50 percent, unchanged from July. 
“Further space remains for market lending rates to decline, particularly with the high level of excess liquidity in the money market, which is deposited with the Central Bank at 4.50 percent SDFR at present,” the monetary policy statement said. 

The Monetary Board also expects private sector credit, which had recovered in August, to continue to grow in the period ahead, aided by this massive excess liquidity and the lower lending rates in the economy. 

The excess liquidity in the money market slumped by Rs.48 billion on October 2 to Rs.139.40 billion as Central Bank settled a billion dollar sovereign bond that week. 

However, the excess liquidity levels again built up to Rs.203.11 billion by October 23, in three weeks since the bond settlement. 

Meanwhile, the total value of the Treasury bills and bond stock held by the Central Bank or the printed money stock increased from Rs.457.76 billion to Rs.501.66 billion on October 20 before settling at Rs.491.66 billion on October 23. 

On October 2, such holdings by the Central Bank soared by Rs.123.1 billion to Rs.445.16 billion as the Central Bank bought Treasury bills equivalent to that amount to facilitate the government to settle the bond.