CB expects lending rates to fall further shortly

The Central Bank (CB) yesterday said it has taken a number of measures to reduce lending interest rates in the country’s banking system so that small and medium-sized enterprises (SME) can borrow at reduced rates.

The banking sector regulator said it requested all licensed banks and non-bank financial institutions (NBFIs) to reduce interest rates on deposits with effect from April 29, 2019.

“This measure was taken to accelerate monetary policy transmission through the financial sector, enabling licensed banks to reduce their interest rates on lending products in general, and to SMEs in particular,and thereby enhance credit flows to the real economy,” the CB said.

Accordingly, interest rates on savings and fixed deposits less than 3 months were based on the Standing Deposit Facility Rate (SDFR), while longer tenures were based on the 364-day treasury bill rate.

The CB has also injected substantial rupee liquidity to the domestic market by reducing the Statutory Reserve Ratio along with a 50 basis points cut in policy rates on May 31.
Commencing July 1, the CB further revised reference rates applicable on deposits of banks and NBFIs for the third quarter of 2019, and the maximum interest rates that can be offered on savings and fixed deposits have reduced further by 50 basis points and 171basis points respectively, thereby reducing the cost of funds of banks and NBFIs. 

The average weighted prime lending rate of licensed commercial banks has also reduced by 127 basis points from 12.24 percent as at April 26, 2019 to 10.97 percent as at July 12, 2019.
Accordingly, the CB expects lending rates of banks and NBFIs to reduce further in the immediate future, and borrowers, particularly SMEs can expect to obtain credit facilities at reduced interest rates from banks and NBFIs. 

The CB said it will closely monitor the behaviour of bank interest rates and take further measures as appropriate in the future to support economic growth given well-contained inflationary pressures.