Lenders likely to lower borrowing costs, survey shows

Lending rates are expected to fall further as the current levels are not sustainable in view of the lower policy rate, market watchers say.

Analysts say the average lending rates stand at over 18 per cent while the Central Bank Rate (CBR) is at 9.5 per cent.

“We remain of the view that bank rates are not sustainable...The last time the Central Bank’s policy rate (CBR) was below 10 per cent, banks were lending at 14.8 per cent,” said Kato Mukuru of Citi Global Markets, the investment arm of the US multinational bank.

The Monetary Policy Committee (MPC) survey for February indicates the private sector projects that lending rates will come down due to expectation of muted inflation and improved liquidity.

(Read: Businesses see rise in inflation, says MPC report)

Seventy-two per cent of the respondents in the survey said they expected lending rates to come down by between one and two percentage points (to 16-17 per cent) going forward.

With more cash available as seen in recent oversubscriptions in Treasury bill auction, expectations are that the cost of borrowing money should come down.

Analysts say many banks that benefited from the high interest rates in 2012 are likely to see lower net interest income, forcing them counteract by bringing down the deposit rates and bidding high at T-bill auctions.

CBK data shows bank lending rates averaged at 18.13 per cent in January 2013, double the current CBR rate.

The Citi Global Markets report noted that commercial banks had increased lending rates by 6.02 percentage points in 2011 on the back of the 17.26 percentage point increase in T-bill rates.

But, it noted Kenyan banks have only reduced their 2012 lending rates by about two percentage points, despite T-bill falling more than nine percentage points over the same period.

“Lending interest rates [are] expected to continue declining in the remainder of 2013 due to low inflation and improved liquidity conditions. But expected pick-up in economic activity following successful elections [is] expected to increase demand for loans,” said the CBK in its report on the survey that was conducted a month ago.

The respondents to the survey—commercial banks—said “both supply and demand for credit are expected to increase in the remainder of 2013 with declining lending interest rates and expected pick-up in economic activity.”

But Vimal Parmar, head of research at Burbidge Capital, said further reduction in lending rates would depend on the CBR remaining at 9.5 per cent or lower in the coming months.

“Our analysis shows that other factors constant, the CBR would remain at 9.5 per cent up to June but it could change after that depending on the budget and developments in inflation,” said Mr Parmar.

The possibility of the lending rates failing to come down would be driven by the general prices rising rapidly.

Inflation has risen at a slow pace in the past three months. Overall inflation rose to 4.45 per cent in February from 3.67 per cent in January and 3.25 per cent in December. One of the major reasons cited for the rise was an increase in cash in circulation due to election-related spending.

Even though there might be pressure for lending rates to come down, there is also the tendency for commercial banks lowering deposit rates in order to maintain the same profit margins.

“If interest rates come down, then you can expect to see commercial banks lowering the deposit rates so that they can keep their profit margins,” said Mr Parmar.

Anticipating lower lending rates, commercial banks are already trying to keep or raise their profit margins from falling by bidding high at the Treasury bill market with the latest 91-day paper rising by 0.221 percentage points to 10.318 per cent.

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