Banks resort to weekly pricing of deposits as volatility heightens 

Some licensed banks have been compelled to price their deposits on a weekly basis looking at the direction of how the Treasury bill yields move at the weekly auctions as the yields and rates have become extremely volatile amid the deepening economic crisis.

This is an unprecedented development as pricing of deposits have never been this frequent until recently.  Banks have a dedicated committee to determine rates of their assets and liability products and the recent developments reflect that this committee is meeting every week as opposed to typically monthly or fortnightly gatherings to determine the rates of their loans and deposits. 

After remaining relatively stable for five consecutive weeks, the Treasury bill yields rose by between 180 to 312 basis points last week across all three tenors reflecting the tight liquidity in the market and heightened uncertainty in the economy.  

Soon after the yields rose, some banks informed their clients of new deposit rates which had been priced upwards. 

Banks typically price their deposits somewhat below the Treasury bill rates so that they could fetch a margin by parking them at Treasury bills at the weekly bill auctions when the government borrows money to bridge the budget deficit.  The most recent data available through the end of May showed that banks were offering 17.19 percent on average for their deposits, up from 15.63 percent in April and 4.90 percent a year ago when rates in Sri Lanka were at their historical lows.  The Treasury bill yields rose to 23.85 percent, 24.40 percent and 23.84 percent across 3 months, 6 months and 12 months bills respectively from 20.73 percent, 21.90 percent and 22.04 percent in the previous week.  

The average new lending rates were at an elevated 20.0 percent levels by May end, up from 13.72 percent in April and 4.90 percent a year earlier.  Sri Lanka’s banks have virtually shut their lending taps in May as seen from the private sector credit data for the month which rose by just Rs.2.0 billion.

The bond traders and investors expect the yields and the rates to climb further as liquidity gets tightened in the markets amid soaring inflation and the deepening economic crisis.