Finance company deposit ceiling rate further raised as interest rates surge

The Central Bank last week raised the maximum rate offered for deposits by finance companies effective from April 1, as market interest rates have surged substantially since the last revision made in December for the quarter that followed from January through March 2022. 

The Central Bank has tied the finance companies’ deposit rates to the average Treasury bill rate in the previous quarter to ensure that no finance company offers excessive rates to attract deposits into the sector, which could lead to unhealthy competition. 

Such benchmark yields started a wild run in the recent weeks with the hope of further higher rates in the market in response to the record high inflation, which reached 18.7 percent in March from a year ago.
According to the fresh instructions issued last week,

finance companies can now offer up to a maximum of 13.52 percent for one-year term deposits with the exception of senior citizens who are eligible for a 50 basis points premium. 

The new rates would come into effect from April 1, 2022 onwards as the Central Bank issues the reference rates just prior to the beginning of a new quarter of the benchmark rates that the finance companies must use to calculate their offer rates to the customers.  This is a massive jump from the previous quarter’s maximum rate offered for one-year term deposit rate which was 10.11 percent and thus works out to a over 3.40 percent increase within the forgoing quarter. 

The finance companies can offer up to 200 basis points above the average one-year Treasury bill rate that prevailed during the previous quarter when pricing their one-year term deposits in the following quarter. 
In a separate report, Mirror Business showed that some of the banks are also feeling the pinch on their margins and profitability due to the sharp rise in deposit rates of late. 

As a result, some small and medium size lenders have paused lending until more certainty and predictability arrive at extremely volatile and uncertain market conditions. 

The one-year Treasury bill rate rose by 28 basis points to 12.28 percent last week and the yield has risen by an outsize 4.04 percent so far during this year with more upside in the next few weeks and month.