In a clear sign that banks are getting funds much more cheaper than before, one key lender last week, announced that it was cutting interest rates on all categories of loans, ostensibly to boost its retail lending business, and also unveiled a fixed rate for mortgage loans. Though the so-called rate crash still meant a customer would pay 24 per cent when certain fixed charges are factored in, not a few wonder if this has any connection with a drastic drop in deposit rates with banks now offering next to nothing for deposits.
A quick survey last week showed that deposit rates had headed south in tandem with yields on treasury bills since the beginning of the year as the banking system remains awash with cash, which most borrowers however cannot access in a risk averse financial sector.
For instance, 90 days rates for term deposit at First Bank fell to three per cent last month, down from 10 per cent. Savings stood at three per cent while call rates hovered between 0.5 and 1.75 per cent. On the lending side however, interest rates, except for agriculture, which is a maximum of 22 per cent and government loans, which is 23 per cent, command a maximum of 24.25 per cent.
At Oceanic Bank International Plc, the average interest rate for deposits is 0.25 per cent for current account deposits; three per cent for savings; and between two per cent and 7.5 per cent for term deposits. Lending, rates however ranged between 17 per cent for mortgage, which is the minimum, and 27 per cent for government loans.
By the estimation of analysts at Financial Derivatives Company, led by Mr. Bismarck Rewane, interest rates continued their downward trend in March with the Secured Open Buy Back coming down 120 basis points to 1.05 per cent while Overnight rate fell to 1.17 per cent from 2.2 per cent in February.
Yields on government securities also dropped further in response to the reduction in standing deposit facility rate. The 91-day Treasury bill auction was down to 1.05 per cent from 2.02 per cent the previous month while 182-day fell 0.87 per cent to 1.53 per cent. The 364-day bill dropped significantly to close at 1.9 per cent from 4.55 per cent the previous month.
However, average prime and maximum lending rates remain high at about 17 per cent and 22.5 per cent respectively.
Bank customers however worry that they are holding the short end of the stick as banks that have unilaterally cut deposit rates have not offered any real concurrent benefits in terms of better borrowing terms.
According to Mr. Wale Akinlabi, who runs a commodity trading firms in Lagos, ”Banks can cut interest rates because they know you cannot buy T-Bills and people are still wary of the stock market in spite of the bullish trend so far this year, but it is wrong to keep interest rate at 24 per cent. The spread between the deposit and lending rate is scandalous.”
Some analysts are worried that the trend appears to be a negation of attempts by the Central Bank of Nigeria to close the gap between deposit and lending rates, especially with the hidden charges in many of the transactions.
The Governor of the CBN, Mr. Lamido Sanusi, had in March last year, pegged deposit and lending rates to a maximum of 15 per cent and 22 per cent respectively.
The Bankers Committee in supporting the move observed that interest rates had risen to levels considered to be intolerable and not supportive of the desired economic recovery and accordingly decided that they would not source deposits at rates above 15 per cent and also keep lending rate at a maximum of seven per cent above the deposit rate. All other charges would be at most two per cent.This implied that lending rates would not exceed 24 per cent at the maximum.
On the discount window, the CBN pegged its rate not more than 500 basis points above the monetary policy rate of six per cent.The apex bank also directed that all the banks should make public the various rates attached to the various sectors to enable the borrowing public to compare the various offerings.
Analysts have, however, said despite the crash in rates, banks were still discouraged from lending as a result of the ongoing reforms, which dealt a severe blow on some of them, which might be why lending rates remain on the high side.
According to the President, Financial Markets Dealers Association, Mr. Akinsonwon Dawodu, “Even though rates are falling, it has not really translated into lending. The credit is not expanding. The reason is the aftermath of the crisis. The banks have become more risk averse. At a time they are writing off bad loans and being probed, they are not likely to lend. What you see is that rates are falling from the deposit side. Retail borrowers‘ major constraints have been the credit history.
“This time last year, 30-day Nigeria Inter-Bank Offered Rate was 17.58 per cent, now it is 5.10 per cent. This benchmark was at its historic low of 4.88 per cent in March 2010. Interest rate decline was triggered by the August 14, 2009 audit report and bailout and rates are expected to stay low in 2010 but with a possible pick up in the second half.
According to him, “The Federal Government will have to fund its huge deficit via domestic borrowing and this should ultimately put pressure on interest rates. The CBN might have to raise rates much later in the year if inflationary pressures persist.” Speaking in the same vein, a former National Economic Adviser, Ambassador Issac Aluko-Olokun, said the depression in the capital and property markets had been responsible for the cautiousness on the part of banks to suspend lending.
According to him, ”The capital market, property market and the real sector players have remained depressed since the economic meltdown of the past two years or so.
“In addition to the weak macro-economic fundamentals, banks have been quite cautious in their operations. Since they have been once beaten, they are twice shy and will wait for the CBN to clear their December 31, 2010 accounts before they can some lending.”