Relief for borrowers as banks drop plans to raise cost of loans

Commercial Banks have shelved plans to increase the cost of loans, offering borrowers a much-needed relief and signalling a possible revival of large investments whose prospects looked gloomy in the past couple of months with the steep rise in interest rates.

The pull-back follows a steep fall in Treasury bill and bond yields from 22.5 per cent on October 21 to 9.7 per cent last week.

Standard Chartered Bank and Barclays Bank began the race to the bottom last week with messages to their customers that they had shelved the planned increase in lending rates, leaving them at levels that were last revised in September.

Kenya’s largest bank by customer base Equity yesterday followed suit with the cancellation of notices sent out last month telling borrowers of plans to increase interest rates by up to six percentage points with effect from November 19 — tipping the scales in favour of lower lending rates.

READ: Dropping T-bill rates signal return of cheaper bank loans

“On October 20, we gave a one-month notice that we would increase interest rates by a significant margin of about six hundred basis points but following this correction of interest rates we want to withdraw this notice before it becomes effective,” said Equity Bank’s chief executive James Mwangi.

The increment would have seen Equity’s interest rates rise to a minimum of 24 per cent and high of 27 per cent, depending on a borrower’s risk profile.

Mr Mwangi said the increase would have increased Equity weighted average lending rate to 20.4 per cent from the current 17.8 per cent.

Standard Chartered said last Friday that it had sent out short messages to its borrowers withdrawing the previous notice that would also have seen lending rates rise to highs of 27 per cent.

“We are pleased to aise that due to improved market conditions, the interest rate increase communicated on October 19, 2015 to take effect on November 19, 2015 on your loan facility, has been revised downwards,” the bank said in a notice to customers that left its average lending rate at 22.40 per cent. 

Barclays Bank of Kenya said it was offering unsecured salary loans at 18.5 per cent down from 21 per cent.

The impending increase in interest rates had cast a dark shadow over Kenya’s economic prospects as it was expected to force most investors to shelve their expansion plans in the wake of high financing costs. Mr Mwangi recently aised Optiven Limited — a medium-sized firm — to postpone plans to borrow Sh1 billion from the bank till the interest rate environment improved.

READ: Optiven eyes farmers with insurance cover

The interest rate reversals came one day ahead of the Central Bank of Kenya’s (CBK) monetary policy committee meeting to be held today.

CBK governor Patrick Njoroge last week told Parliament that he expected commercial banks to lower the cost of loans, citing the drop in the cost of funds that came with the decline in the cost of short term government debt instruments.

Analysts said they expect the CBK to retain its indicative rate, the CBR, at the current level of 11.5 per cent in order to sustain the ongoing decline in lending rates.

“We see the central bank maintaining a stable interest rate environment over the next few months to sustain the ongoing fall in bank lending rates, whose margin spreads are wider to offset volatile money markets,” said Kestrel Capital.

The cancellation of scheduled interest rate increases follows a drop in benchmark Treasury bill and bond yields in the last three weeks, stopping the rise in the cost of deposits to banks.

The drop in the cost of government borrowing follows the Treasury’s loss of appetite for domestic debt after it secured a Sh80 billion syndicated loan from international markets.

Analysts at Stanlib Investments expect interest rates to pick up again as the Treasury looks for additional cash to fill the revenue gap.

“We expect that the sustained pressure on the local currency and slowdown in tax revenue collection may require some form of renewed monetary policy tightening,” said Stanlib.

The notices by banks were to effect a second round of rate increments following an initial increase in September that came in the wake of a two-percentage-point rise in Treasury bills and bond rates in July.

In September the Treasury raised T-bill rates further, offering investors a 23 per cent rate of return on money lent to government for one year, up from 10.6 per cent in January.

Large depositors demanded that the lenders match the Treasury’s risk-free rate for their money, causing a sharp increase in the prices of both old and new loans as the banks moved to protect their profit margins.

Mr Mwangi said Equity’s net interest margins would not be affected by the deposits it booked during the high interest rate period as most were not long-term.

“We only have 15 per cent of our liabilities on term deposits,” Mr Mwangi said, adding that the bank had rejected highly priced deposits.

Data from the CBK shows small banks are offering the most expensive loans due to the higher cost of funds they incur.

In October, the small banks charged an average of 17.3 per cent, up from 16.2 per cent in June. Mid-sized banks were the cheapest at 15.9 per cent compared to 15.5 in June while large banks charged 16.4 per cent, up from 15.4 per cent in June.

It remains to be seen whether the small banks will withdraw their notices.

Commercial Bank of Africa, which upgraded to a large bank early this year, was non-committal on whether it was going to retain its current rate, stating its notice to increase interest rates by two percentage points effective December 7  stands for the time being.

NIC Bank had announced that its higher interest rates would take effect on December 1.