Lending rates see faster pass-through as monetary easing takes hold

Sri Lanka’s bank lending rates are on the decline and the sector got on to a better start with higher number of applications for new loans receiving as the measures taken for monetary easing take hold. 

“Lending rates continued to decline while the prime lending rates tended towards upper single-digit level (9.69 percent),” ICRA Lanka said in its latest Monthly Economic Update for January. 

The Monetary Board of the Central Bank cut the key policy rates by 50 basis points in January to expedite the pass-through of low interest rates into the market. 

“The policy rate cut resulted in the Average Weighted Call Money Rate (AWCMR) declining by nine basis points and helped to ease the yield rates of the government securities (50 basis points for most of the longer tenor instruments, 40 basis points for mid-tenor instruments and over 10 basis points for most of the short-tenor instruments),” ICRA Lanka said.

Meanwhile, the Average Weighted Lending rate (AWLR) fell to 13.59 by end-December, from 13.65 percent in November, prior to the effects of the rate cut.

The Average Weighted New Lending Rate or AWNLR, which is a closer indicator of the new loan prices, fell to 12.80 percent by end-December, from 12.87 percent in November, the latest Central Bank data available for end-December showed. 

The AWLR and AWNLR are already responding to the earlier rate cuts and other lending rate caps imposed since September 2019. 

This week Commercial Bank of Ceylon advertised the lending rates as low as from 11.5 percent for a range of products from home loans, leasing, personal loans, SME loans and education loans, with strings attached. 

Meanwhile, the banks are seeing a gradual increase in new loan applications and many are confident of a turnaround in the business supported by the dual anchor, which the sector and the economy received from the fiscal and monetary policy tweaking. 

As the fourth quarter earnings season is currently in full swing, many private lenders are reporting higher loan disbursements during the final couple of months in 2019, which they believe would serve as a harbinger for what to expect in 2020. 

However, analysts point out that while the rising demand for loans is a good indicator to show the economy is recovering from its bottom, policies should be sharp enough to direct such bank lending to productive sectors to prevent the economy from overheating as it did in previous occasions. 

Meanwhile, the Average Weighted Prime Lending Rate or the rate offered for prime customers of the banks—mostly big corporates—inched up by 5 basis points to 9.52 percent, from 9.47 percent a week ago.