Finance company deposit rates rise further as T-bill yields climb

• CB issues revised ceiling rates for tenors up to 5 years effective from Nov.01  
• Move must have been prompted by sharp upward movement seen in T-bill rates 

The interest rates on term deposits offered by finance companies are continuing to increase in lockstep with the sharp increase in Treasury bill rates seen lately as the regulator this week issued fresh guidelines further increasing the maximum rates that can be offered on term deposits.

Licensed finance company savings deposits rates are linked to Central Bank’s Standing Deposits Facility Rate (SDFR), which is at present at 5.00 percent while the term deposit rates are linked to the weighted average 1-year Treasury bill rate in the previous quarter, which is calculated at 7.88 percent, according to the guidelines issued by the Central Bank this week on new reference rates. 

With the new guidelines coming into effect from November 01, a finance company can now offer up to a maximum of 9.88 percent on a 1-year deposit as the ceiling rate for most popular tenor is worked out by adding 2.00 percentage points above the benchmark 1-year bill yield.

However, the finance companies can offer up to another 50 basis points for senior citizens’ deposits. 

The longer the deposit tenor, the higher the amount of percentage points that can be offered on top of the benchmark yield rate and vice versa as 1-month deposit placed at a finance company gets precisely the 1-year bill yield while the 6 months deposit gets up to 25 basis points above the 1 - year bill yield. 

The Central Bank issues a quarterly guideline to the licensed finance companies with reference rates for maximum interest rates on savings, term deposits and debt instruments.

However, this week’s guidance came as an additional one as the Central Bank earlier issued the new benchmark rates applicable for the October - December quarter, which increased the maximum 1-year deposit rate by 95 basis points to 8.16 percent.

The new guidance could be a result of the sharp upward movement seen in Treasury bill rates seen since mid-September when the reference yields which effectively acted as a cap on them were removed. The August policy rate hike also pushed Treasury yields higher. 

Since then the yield of the 1-year bills in the primary auction had climbed by as much as 2.06 percent to 8.18 percent by last week.  In addition, the new guidelines also revised the reference rates applicable for the maximum interest rates for deposits with tenors above one year, effectively replacing the directions issued on the same on April 24 last year but left the maximum interest rates derived for debt instruments that can be offered by the finance companies unchanged.  Accordingly for 2-year deposits, a finance company can offer up to 1-year Treasury bill rates plus 2.25, changed from 2.75 percent; for 3 year deposits but less than 5 years up to 2.75 percent, changed from 3.25 percent; and for five years, up to 3.25 percent, changed from 3.75 percent before, all above the 1- year bill rate.