Prime lending rate hits 5-year low

• AWPLR fell 40 bps last week to 6.25%, lowest since January 2015
• AWPLR has fallen 359 bps or 3.59% YTD responding to policy rate cuts
• Average weighted deposit rate by end-Aug. was 6.74%, down from 7.16% in July

The prime lending rate or the rate at which loans to prime customers of banks are priced, touched its lowest level last week, breaking its previous lowest five years ago.

The average weighted prime lending rate (AWPLR) of all loans granted by banks to their prime customers, as of last week fell by 40 basis points (bps) to 6.25 percent. The previous lowest was 6.26 percent in January 2015. 

The AWPLR made an about turn the week before, after falling for many consecutive weeks, raising questions whether it had finally bottomed out. The key benchmark rate inched up 10 basis points to 6.65 percent in the week ended on September 11, ending its declining spell. 

The AWPLR has now fallen by a total of 359 bps or 3.59 percent, as at September 18, in response to the back-to-back cut in key policy rates by 250 bps so far this year and other macro-prudential measures to pass the full benefits of the eased monetary policy to borrowers. 

There were concerns that banks might hold off lending to corporate clients, as the AWPLR had fallen below the average cost of deposits, which effectively discourages the banks from lending, since it costs them more than what they earn from loaning such moneys. 

The average weighted deposit rate by end-August was 6.74 percent, down from 7.16 percent in July. 

However, the banks tend to match their lending to their prime clientele, who often gets a better deal than the small and medium-sized clientele, with low-cost funds made up of demand deposits and savings accounts. 

The most recent data showed a spike in demand deposits and a sizeable increase in savings and time deposits, by both companies and individuals, during and after the coronavirus lockdowns, as they chose leaving more cash in their bank accounts.

This provides more wiggle room for banks to lend at lower rates, as more demand deposits generate no additional cost to banks while the average cost of savings deposits has now fallen less than 4.0 percent, bringing down the overall cost of funds of banks. 

In practice, banks match their low-cost lending with low-cost funds, which are typically made up of demand and savings accounts. Last week, the one-year treasury bill rate at the primary auction held was steady at 4.88 percent while the yields for the six-month bills and three-month bills fell by one bps each, to 4.64 percent and 4.51 percent, respectively.