Lending rates heading north?

Despite efforts by monetary authorities to ensure a declining interest rates regime there seems to be upward pressure.

An analysis of published Average Prime Lending Rates (AWPR) of commercial banks between last week and early January, rates of at least 12 banks have increased and only eight have reported declines whilst there was no change by two others.

The increase is among top lenders such as Bank of Ceylon, Commercial, HNB and Sampath whilst People’s Bank and HSBC figure among whose AWPR had declined.

Analysts noted that whilst AWPR is applicable to only select few top customers of banks, the rest of the borrowers pay a much higher interest rate.

The increase has begun to cause fresh alarms among the broader private sector which continues to maintain that interest rates charged are relatively high or doesn’t factor the improved macroeconomic fundamentals portrayed by the Central Bank.

As per Central Bank data however the average weighted prime lending rate of all commercial banks was 9.53% higher in comparison to 9.25% but lower as against 10.31% a year earlier i.e. July 2010. The FT analysis is between last week and early January which reflects an increase.

Last week releasing its statement following the July monetary policy review the Central Bank said the average broad money growth during the first five months of 2011, at 17.9%, has been higher than expected mainly due to the rapid growth of credit obtained by the private sector.  

“However, it is expected that there would be a deceleration in the expansion of credit obtained by the private sector during the remainder of the year, due to some saturation, helping subdue monetary expansion in the ensuing period,” the Bank added.

It also assured that it will continue to closely monitor monetary developments with a view to taking appropriate and timely policy action if required. These and other macro economic factors encouraged the bank to leave policy rates unchanged, a move in line with most banks. Repurchase rate remains at 7% and Reverse Repo at 8.5%. With no change in July the policy rates had remained unchanged for six months.

Twelve out of 13 analysts polled by Reuters prior to July Monetary Review expected rates to remain unchanged.  All 13 expect commercial banks’ Statutory Reserve Ratio (SRR) to remain unchanged at 8 percent.

There had been some concerns that private sector credit growth may cool after hitting a 16-year high of 31.4% in April year-on-year mainly due to a lower base in the previous year. However May data showed the figure surpassing to a record 33.3% as against 3.4% a year ago.

Total credit to the private sector as at May 2011 stood at Rs.1.664 trillion, up from Rs.1.630 trillion in April and Rs.1.248 trillion a year ago. Within the past one year private sector credit had grown by Rs. 416 billion whilst since end December 2010, the borrowing is an estimated Rs. 170 billion.

Central Bank in its July statement expressed confidence over improving prospects for the economy as well as low pressure on inflation.

It said Sri Lanka’s economy expanded by 7.9% in the first quarter of 2011, sustaining its high growth momentum in the previous year into 2011 as well.  The expanded productive capacity of the economy will help enhance supplies of food as well as other commodities, thereby helping to bring down consumer prices, which results in headline inflation reducing from the April 2011 peak level.  Inflation, as measured by the year-on-year change in the Colombo Consumers’ Price Index (base=2006/07) was 7.1% in June 2011, compared to 8.1% in May 2011.  Annual average inflation was 6.7% by June 2011.

The pass-through of higher international commodity prices into domestic prices partly accounted for the recent increases in core inflation, as measured by the core inflation index that excludes fresh food, energy, transport, rice and coconut from the CCPI (base=2006/07).  “Nevertheless, headline inflation is expected to decline further in the months approaching as price developments as a result of continued domestic supply side improvements are expected to offset price adjustments due to movements in international commodity prices,” the Central Bank said.

On the other hand economists have expressed concern over high core inflation, control of which has been off-mark on the part of the Government. The International Monetary Fund in June also asked the Central Bank to be on the lookout for signs of overheating.

Pulse of Prime Lending Rate

Bank    January 7    Last week

Increases

Bank of Ceylon    10.36    11.04

Hatton National Bank    8.54    8.95

Commercial Bank    8.65    10.48

Sampath Bank    8.57    9.80

Seylan Bank    9.54    10.23

Pan Asia     10.75    10.80

NDB Bank    8.66    8.67

DFCC Vardhana Bank    8.76    9.48

Standard Chartered     8.11    8.47

Deutsche Bank    8.09    8.55

Habib Bank    10.47    11.79

MCB Bank    8.58    12.17

Declines

People’s Bank    11.23    10.45

HSBC    9.63    9.13

Union Bank     13.68    10.08

Nations Trust Bank    9.04    9.02

Indian Bank    10.77    10.74

Indian Overseas Bank    12.00    11.50

State Bank of India    11.84    11.80

Public Bank    11.75    10.75

Unchanged

Citi     8.14    8.14

ICICI Bank    8.56    8.56

Source: Central Bank