New lending rates in further descent during August as liquidity remains elevated

The new lending rates, the rates which capture the prices of a broader spectrum of loans from small businesses to house mortgages to personal loans, have further moved downwards in August, in a sign that the excess liquidity and aggressive monetary easing, in response to the coronavirus pandemic, are driving down rates faster than at any other time before. 

According to the latest Central Bank data, the average weighted new lending rate (AWNLR) or the average rate of all new loans granted, has fallen by 73 basis points (bps) during August to 9.12 percent.

The AWNLR fell to the single-digit territory for the first time in July, after it logged a 133 bps, a feat that was unthinkable in such a short span of time. 

While the rates offered for the most prime customers have responded faster to the back-to-back rate cuts, the Monetary Board had qualms about the somewhat stubborn nature of the rates offered to small-time borrowers such as micro, small and medium-scale enterprises, as the primary intention was to provide relief and to bring down their borrowing cost, to fast-track economic resurgence beset by the pandemic.

For this purpose, the Central Bank appointed an internal committee in June, which meets daily to smoothen out and expedite the monetary policy transmission process, to ensure that the moneys would flow to the intended recipients at low rates, which in turn keep small business afloat, encourage production and new investments to create new jobs and to earn export incomes. 

This has resulted in a steeper fall in the AWNLR by 2.06 percent in July and August, bringing the cumulative fall in the new lending rate by 3.68 percent from January through August. The Monetary Board has slashed key policy rates by 250 bps in four instances so far this year. 

The excess liquidity in the money market also rose from Rs.147 billion in end-July to Rs.191 billion by end-August, pushing interest rates downward. 

Meanwhile, the average weighted prime lending rate (AWPLR), the rate at which loans to the most prime customers of banks are priced at, logged a 20 bps, increased during the week ended September 25 to 6.45 percent, after touching a record low of 6.25 percent in the week ended on September 18. 

As a result of the continued downward shift in the new loan rates for both big and small borrowers, the average weighted rate of the entire loan stock of the banking system fell by 45 bps in August, bringing the total decline in the rate to 1.75 percent during the first eight months to 11.84 percent.

Meanwhile, the average rate of new deposits fell by 29 bps during August to 5.49 percent, bringing the cumulative decline for the first eight months to 3.40 percent. 

As a result, the cost of total deposit stock of the banking system has declined by 1.46 percent to 6.74 percent by end-August, bringing down the cost of funds of the banking system. The latest data for end-September showed that the average rate of the total deposit stock of the banking system has further declined by 30 bps, pointing to continued downward shift in new deposit rates during September.