CB revises guidelines on finance company deposit rates due to extreme volatility in T-bill yields

• Finance companies now price deposits every week using average of last 4 weeks’ bill yields as opposed to quarterly revisions 
• As a result, they now offer deposit rates comparable with treasury bill yields in the north of 23.25% 
• Yields and rates appeared to have peaked as seen from previous two weeks’ bill auctions which reversed direction  

As Treasury bill yields went through a sharp correction since policy rates were hiked by 700 basis points on April 8, the Central Bank has revised its direction forthwith to determine as to how the finance companies must be pricing their deposit rates as their deposit rates are tied to average bill yields, which changed only every quarter until the beginning of April. 

But, quarterly revisions in their benchmark bill yields made little to no sense when the Treasury bill yields went on a wild ride in the aftermath of the jumbo policy rake hike in April. 

As a result, the Central Bank has revised the guidelines enabling finance companies to use the average bill rates of the last four weekly bill auctions as benchmark rates to price their deposits. 

Under these fresh guidelines, which came into effect from April, the Central Bank will issue the average yields of the bill yields of the last four auctions, an about turn from the previous practice of quarterly average yields, which will then be used by finance companies as guidance rates to price their deposit rates up to next one week. 

However, the benchmark rate or the guidance rate will change every week as the Central Bank will issue new benchmark rates incorporating the yields of the latest weekly bill auction, making the benchmark yield something similar to a moving average rate. 

Hence, this will prompt finance companies to amend their fixed deposit rates every week in their advertising and promotional materials, as the rate that they offer for the next week would change, depending on how fast the yields change in the latest bill auction. 

To this effect, the necessary amendments to the relevant Directive on finance company deposit rates have already been made by the Central Bank. 

As a result of the new guidelines, a finance company can now offer up to around 25.75 percent for its 1-year term deposits at maturity, as according to the guidelines, they can price up to 200 basis points above the average 1-year Treasury bill rate. 

The 1-year Treasury bill rate settled at 23.75 percent at the last week’s auction after Central Bank sent strong signals three weeks ago that the yields had overshot and would intervene to stabilise the yields.

During the weekend, a finance company advertised offering 23.75 percent for 1-year term deposit rate at maturity, which includes an additional 50 basis points entitled by senior citizens. 

While finance companies can offer even higher rates for their longer tenor deposits which are also linked to bill yields, they remain self-restraint to ensure that they do not excessively price their deposits. 

Even if they do price up their deposit rates making use of their full allowable limit over and above the benchmark rate, they will not have many avenues to lend those money as people and businesses are in a bad shape to get new loans as their incomes have gotten hammered from the hyper inflationary conditions prevailing since March.