Finance company deposit rate ceiling up on rising T-bill rates

„New CB circular raises ceiling rate of one-year deposit rate by 95bps

„One-year T-bill rate rose 27 bps to 7.28% at yesterday’s auction

The maximum deposit rates that can be offered by a licensed finance company for a one-year term deposit has risen by a little under one percent in the quarter beginning from October 2021, as the ceiling rates of deposits offered by the non-bank lenders move in tandem with the one-year Treasury bill rate.

Accordingly, the Central Bank has issued a circular a few days ago stipulating the new ceiling rates for term deposits that can be offered by the licensed finance companies for the quarter from October through December.

It is customary for the regulator to issue quarterly ceiling rates on deposit rates, based on the average weighted one-year Treasury bill rate in the preceding quarter, with set percentage points that get added on top of the benchmark bill rate, depending on the tenure of the deposit.

The new circular has effectively raised the ceiling rate of the oneyear deposit rate by 95 basis points, effective from last Friday, (October 1), as the Treasury bill rate for the one-year tenure rose sharply in the three weeks through yesterday since the Central Bank decided to do away with the yield caps.

At the weekly primary bill auction held yesterday, the oneyear Treasury bill rate rose by another 27 basis points to 7.28 percent, bringing the cumulative increase in the benchmark yield to 1.16 percent since the yield caps were removed.

Meanwhile, the yield of the three-month bill jumped 45 basis points to 7.15 percent and the six-month bills rose by 21 basis points to 7.20 basis points at the primary auction held yesterday, where the Central Bank accepted 72.2 percent or Rs.47.4 billion of the total bills sold.

With the new ceiling rates, the licensed finance companies can offer up to 8.16 percent for one-year term deposits during the October-december quarter, with the provision to offer up to another 50 basis points in the case of senior citizens’ deposits.

And many finance companies have already publicised their deposit rates at the new ceiling rate while a few, the ones with adequate excess to liquidity and access to non-deposit funding sources, haven’t made the adjustment upwards.

Although the banks have the discretion to set their deposit rates and aren’t governed by any ceiling rate, they have so far been slow to respond to the rise in the interest rates in the gilts and the prime lending rate.

While they could also follow suit, there isn’t an urgent requirement for them to mobilise deposits, as they already operate with sizeable excess liquidity levels, which have been further cushioned by non-deposit fundings raised since the pandemic last year.