Some universal banks in the country have slashed down their base rates to in response to the policy rate cut by the Bank of Ghana (BOG) last week.
The BoG reduced the policy rate, the rate at which it does overnight lending to universal banks in the country which serves as a basis for the banks in setting their respective base lending rates, as well as lend to their most favoured customers, from 13.5% to 13%.
In response to this, some universal banks including Agricultural Development Bank, (ADB), Unibank, Zenith Bank and UT Bank have all reduced their base lending rates. ADB reduced its by 1.95% to 20.00%, Unibank reduced its rate from 25.95% to 24.95% representing 1% reduction, UT Bank marginally reduced its rate from 25.95% to 25.90%. Zenith bank on the other hand slashed its rate by 155 percentage points, being the highest so far, to 23.95% from 25.50%. More banks are expected to follow this trend in the coming weeks.
This is the second round of base rates cuts so far this year by Ghana?s universal banks. Some of the banks had already slashed their rates weeks before the announcement of the reduction of the policy rate by the BoG. This was due to the favourable economic condition and changes in the banking sector at that time. Their actions were proactive to the signals usually sent by the BoG through its policy rate.
During the first round of base rates cuts which occurred between March and April this year several banks responded to an increase in liquidity within the banking system and improved loan book quality as borrowers improved cash flow enhanced their repayment performance on already existing loans, the combination of which persuaded the banks to regard lending as less risky.
For instance, between March and April Ghana Commercial Bank (GCB), Stanbic Bank, Bank of Baroda all reduced their base to 20.50% from 21.5%, 21.95% from 23.95% and 21.75% from 23.00% respectively. UT bank also reduced its average base lending rate to 25.95% from 26.90%. The average reduction in the base lending rates was 1.55%.
Banks in the country have always been under pressure to cut their base lending rates to reduce the cost of funds. However, they most often respond with marginal decreases, explaining that they hardly fall on the central bank for support therefore the policy rate alone was not an adequate yardstick for a further reduction in their rates, while others maintained that their contracts with lenders had not matured and non performing loans were high.
Financial experts attributed the reduction in the base lending rates to recent funds released by the government of Ghana for the payment of arrears to contractors who contributed significantly to the NPLs of the banks as well as the payment of Tema Oil Refinery?s debt to the banks.
Speaking to the Managing Director of Stanbic Bank, Alhassan Andani earlier, he explained that NPLs were reducing, and inflation had also reduced significantly creating a better environment for lending. ?In the coming months I expect further drop in lending rates of some of the banks,? adding that the average lending rates should be around 18% over the coming period.
Inflation, which stood at 9.1% in November 2010, eased considerably to 8.6% in December 2010 and picked up to 9.1% in January 2011, mainly on account of the increase in the prices of petroleum products announced in the first week of January. Food inflation was 5.3% in November 2010. It dropped to 4.5% in December 2010 but picked up to 4.8% in January 2011. Non-food inflation followed a similar pattern, falling from 11.5% to 11.2% in December increasing to 11.8% in January 2011.
The Ghana Statistical Service (GSS) reports that inflation remained broadly stable in the first quarter of 2011 around 9.1%. The food inflation for the period was 4.7% while average non-food inflation was 11.9%. Currently inflation for the month of April has declined to 9.02%.
Interest rates have continued to decline along the entire yield curve, reflecting a continued disinflation process. Between December 2010 and April 2011, the 91-day Treasury bill rate declined from 12.3% to 12.1%. The 182-day Treasury bill rate also declined from 12.7% to 12.4%.
The rate on the 1-year note fell from 12.7% to 12.5%. That for the 2-year fixed rate note also dropped from 12.7% to 12.5% while the rate on the three year fixed rate bond witnessed a bigger drop of 91bps to 12.4%.
Over the December 2010 and April 2011 period, the overnight interbank rate, the rate at which commercial banks borrow from each other, declined by 9 basis points to 11.6%. Between December 2010 and April 2011, the average base rate quotations of the banks declined by 136 basis points to 24.4% while average lending rates were reduced by 11 basis points to 27.5% over the same period.
The average deposit rates of the commercial banks were similarly revised downward by 153 basis points to 8.98% in April 2011. However, the average savings deposit rate went up marginally by 63 bps to 6.5%.
Institutions such as the Association of Ghana Industries (AGI) and the Private Enterprise Foundation (PEF) see the reduction as boost to production, as they have consistently complained about the relatively high interest rates, despite the consistent decline in the central bank?s policy rate over the past years.