Small business lending rate continues to decline along with prime lending rate

As the prime lending rate touched fresh lows a few times this year, the small business lending rate has also followed suit hitting fresh lows every month in a sign that businesses are now getting the best deal ever from banks when they need more funding. 

The average weighted new lending rate (AWNLR) or the proxy rate for small business lending rate touched an all time low of 8.26 percent by February end, although the pace of decline has been decelerating last couple of months.  

AWNLR has declined by 428 basis points or 4.28 percent in the 12 months to February as the rate stood at 12.54 percent before the Monetary Board of the Central Bank resorted to aggressive policy easing in March last year, to support the virus-hit economy.

In order to make the most of the all-time low borrowing rates, the Monetary Board last week announced priority sector lending targets for banks aimed at channeling more funds to identified sectors to support the broader micro, small and medium enterprise sector.

This means banks could disburse up to Rs.170 billion in fresh credit to the small business sector during 2021 out of Rs.850 billion in new loans earmarked as entire private sector credit. 

When reporting on the decline of prime lending rate on several occasions, Mirror Business said that it was a signal for the rest of the market lending rates to follow suit. 

In fact the decline in the small business lending rate well surpassed the decline in the prime lending rate, which effectively debunks the claims that only the big businesses are getting a better deal from the ultra-low interest rates at the expense of depositors who now get a mere pittance. 

For instance the weekly prime lending rate has declined 3.77 percent in the twelve months to April 23, 2021, whereas the AWNLR logged 4.28 percent decline in the year through February 28, 2021. 

However, there is a rising concern whether the ultra low borrowing rates for both small and big businesses are serving their intended economic policy purposes as they contend with rising prices, making the end consumer the loser, as producers pass the rising costs to the consumer. 

For instance, consumers are forced to pay as much as 10 percent more for their food staples despite the fact that producers are enjoying unprecedented government stimulus by way of lower interest rates, lowest taxes, subsidy schemes, free technical knowledge, guaranteed prices and market access to name a few.