New lending rate seen easing, but with a lag

The average new lending rate in the economy is seeing easing with the aggressive monetary policy easing instituted from the onset of the pandemic as interest rates on loans extended to SMEs are seen coming down, though with a lag compared to the rates offered to big businesses. 

Last week, the average weighted prime lending rate (AWPLR), the rate offered to prime customers dropped by a significant 32 basis points, bringing the cumulative decline in the benchmark loan rate to near 50 basis points (bps) during the two weeks since the Monetary Board cut key policy rates by 100 basis points on July 9. 
AWPLR has so far come down by 194 bps in comparison to the 250 bps cut in the key policy rates this year. 

But members of the Monetary Board and Central Bank were not satisfied with the rates offered to small businesses, which were slow to respond to the policy rate cuts and other 
macro-prudential measures. 

In June, the average weighted new lending rate (AWNLR), which is closely associated with the loans to the SMEs, has come down by 50 bps to 11.18 percent— a sign that the rate could further decline in response to the policy rate cut in July. 

Meanwhile, the Average Weighted Lending Rate (AWLR), which is reflective of the total loans of the banking system, also came down by 32 bps in June to 12.64 percent. 
The AWLR showed less response compared to both AWPLR and AWNLR because the bulk of the loans are skewed towards the pre-pandemic loans offered before the rates started falling sharply.

New SME loans were seeing adjusting somewhat faster lately because of faster approval and disbursement of loans under Central Bank’s refinance credit scheme, which offers loans at 4 percent and the banks are also using their own internal funds to offer loans at mid to higher single-digit rate loans for small businesses and other categories. The Central Bank’s internal committee set up to daily monitor the faster pass through of the lower key policy rates into the real economy may also be aiding the process. 

In June, the decline in the banking sector credit to private borrowers decelerated to Rs.54 billion after falling by Rs.70 billion in May reflecting the faster take up of loans by small businesses and other segments. 

In March, Sri Lanka’s private sector credit reached Rs.120 billion as the economy began to accelerate with the new found optimism and tax cuts before the pandemic brought the economy to an abrupt halt.