Prime lending rate flirts with all-time lows with another 32bps decline

• Average deposit rate fallen below 7% allowing banks to bring down other borrowing rates 

Continuing its descent further, Sri Lanka’s prime lending rate logged a sharp 32 basis points (bps) fall last week, bringing the popular benchmark rate used in pricing loans mainly for big and mid-sized corporates close to its all-time lows in over five years.

With the most recent fall in the key lending rate, the Average Weighted Prime Lending Rate (AWPLR) has now fallen by a cumulative 308 basis points or 3.08 percentage points until the end of last week from the beginning of this year to 6.66 percent, the sharpest such fall in the shortest period of time on record. 

This is in comparison to the 250 basis points cut in the key policy rates by the Monetary Board in four sessions from the beginning of this year. 

Sri Lanka had its all-time low AWPLR of 6.26 percent in January 2015, the Central Bank said recently.

Falling lending rates are a boon to businesses and the consumers alike as it brings down overall cost of capital of doing business, enhancing its value and the competitiveness. On the consumers’ standpoint, they are left with more money to spend, while they could also get their hands on cheap credit for consumption. Monetary Board cut the maximum interest rate on credit cards fortnight ago from 28 percent to 18 percent. 

Meanwhile, the latest Central Bank data till end-July showed lending rates for everything from small business loans, to housing mortgages to consumer loans had come down by a sharp 133 basis points to 9.85 percent during July.

In comparison, the Average Weighted New Lending Rate (AWNLR) stood at 12.80 percent by end-2019. 

The average lending rate of the entire loan stock of the banking sector by end-July 2020 was 12.29 percent, compared to 12.64 percent a month ago and 13.59 percent at the end of 2019.  Meanwhile, the latest data available up to August 28 showed that the new deposit rate had fallen to 6.74 percent from 7.16 percent in July, giving a clear indication that banks are re-pricing their deposits much faster. 

In recent times, banks were seen vying for larger slice of the loan market as they came up with single digit rate loan schemes, mostly targeting small businesses. 

The private sector credit data for July also showed that such credit have significantly gained momentum as the net decline in credit is a paltry Rs.3.6 billion, down from Rs.54 billion in June, as the gross disbursements have climbed up to above pre-pandemic levels.