LNP – Sharp fall in proxy lending rate for SMEs in July

• AWNLR falls sharp 131bps to 9.87% indicating significant boost to small biz
• Decline in prime lending rate close to its historically lowest level reached in 2015
• Deposit rates decline significant 142bps bringing down banks’ cost of funds Â
• Total new deposit rate for year down 311bps; cost of new loans down 293bps
• Muted inflation coupled with cheap credit has ability to provide a flywheel to economyÂ

The proxy rate for small and medium-sized enterprise (SME) loans fell by the most during July, indicating that the interest rates for small businesses are now easing faster than earlier, while also moving in tandem with the rates offered for their larger counterparts.

The average weighted new lending rate (AWNLR), which reflects the price of loans granted most recently, has fallen by a sharp 131 basis points to 9.87 percent in July, from the previous month.Â

“The average weighted new lending rate or the rate at which the banks have lent during the month of July has declined significantly by 131 basis points to 9.87 percent,” said Central Bank Director Economic Research Dr. Chandranath Amarasekara. Â

With this most recent move in the rates, Sri Lanka’s present loan rates have now reached a single digit, a feat which was unthinkable in such a short period of time and would bode well for economic revival, inflation and the overall competitiveness of the economy, as lower borrowing costs bring down the cost of capital for businesses.Â

The recent sharp downward shift in AWNLR also reflects that the banks have significantly ramped up their new lending in the aftermath of the coronavirus shutdowns of the economy, weighing on the average pricing of this new loan stock.Â

The Central Bank last week said it had approved Rs.100 billion loans under its ‘Saubhagya’ COVID-19 refinance facility while the banks have so far disbursed Rs.70 billion.Â
The Central Bank last week announced that it would keep the applications under the scheme open for an additional month, till end-September, as the scheme has more room or another Rs.50 billion in credit to run its course. Â

Apart from the Central Bank liquidity support, the banks on their own have been vying for borrowers with very attractive interest rates, as they are seen allocating their own funds for loans.Â
This becomes possible for banks, since their overall cost of funds is coming down, as reflected in the deposit rate decline in response to the aggressive monetary easing actions of the Central Bank.Â

For instance, the average new deposit rate or the cost of the deposits raised during July alone has fallen by as much as 142 basis points to 5.78 percent, compared to the previous month, taking the total decline in the rate during the first seven months to 311 basis points.Â

Meanwhile, the cost of the total stock of deposits of the banking sector has come down by 146 basis points during the first seven months.Â

The average weighted prime lending rate (AWPLR) or the rate at which loans are priced for prime customers of banks has also fallen last week, reaching closer to an all-time low.Â
The prime lending rate of the economy, the benchmark rate used in pricing most loans, fell by a further two basis points through last week, bringing the rate to 6.98 percent.Â

According to Dr. Amarasekara, this is the lowest prime lending rate since September 2015 and the close to its historically lowest level reached in January 2015, which was 6.26 percent.Â
AWPLR has so far fallen by 276 basis points during 2020, until the end of last week, providing a significant boost to earnings of companies, which have higher borrowings in their balance sheets.Â

Overall, the average lending rate of the entire stock of loans in the banking sector has come down by 35 basis points in July and 130 basis points during 2020, to 12.29 percent, the Central Bank data showed.Â

With the medium-term projections for inflation remains muted and the borrowing costs have reached an all-time low, the combination can well provide a flywheel to a virtuous cycle of higher business investment and consumer spending, setting the Sri Lankan economy into a higher growth path.Â