Finance company deposit rate ceiling raised as competition from banks intensifies

The Central Bank last week issued fresh directions to the licensed finance company sector by stipulating new guidelines on their deposits rates and rates offered when issuing debt instruments. 

The fresh directions appear to have given the non-bank lenders slightly more room to price their deposits at a higher rate than earlier, when the deposit rates were capped at tighter levels in a bid to accelerate the monetary policy transition. Through its directive, the Central Bank has given the green light to licensed finance companies to price their one-year term deposits up to 3.25 percent above the weighted average yield rate (WAYR) of 364-days Treasury bills. 

This is one percent higher than what was allowed when the same tenor deposit rate was capped at 2.25 percent above the WAYR of the 364-days Treasury bills effective April 26.
The Central Bank on April 26 issued directions under the provisions of the Finance Business Act setting maximum rates on deposits and debt instruments that can be offered by licensed finance companies. 

But this was withdrawn on October 18 when the Central Bank issued a fresh directive setting higher caps on deposits and borrowing as the competition from banks intensified with the removal of the ceiling imposed on their deposit rates. Although the deposit rate cap has been raised for the licensed finance companies by up to one percent as in the case of one-year fixed deposits, the nominal rate may not go up by similar percentage points as the benchmark 1-year Treasury bill rate has since come down by at least 150 basis points. 
Meanwhile, the rates, which could be offered for savings accounts, have effectively come down by one percent from October 18 onwards as the savings rate is matched to the Standing Deposit Facility Rate, which now stands at 7.0 percent from 8.0 percent in end-April. 

Since April, the Monetary Board has twice cut key policy rates by 50 basis points each as they were seen deploying every tool at their disposal to bring down the market interest rates in a bid to provide stimulus to the limping economy. 

Meanwhile for other tenors, the Central Bank has changed the ceiling rate for Treasury bill rate plus 0.5 percent for 1-month term deposits from an earlier rate minus 0.5 percent. 
Licensed finance companies could now offer T-Bill rate plus 1.0 percent for three-month deposits and 1.50 percent for six-month deposits which was earlier matched to the T-Bill rate for three-month deposits and the T-Bill rate plus 0.5 percent for six-month deposits.