Lending Rates May Rise as Banks Guard against Credit Default

There are indications that lending rates may increase slightly as Deposit Money Banks (DMBs) adopt cautious approach to guard against likely credit risk in the industry.
The Financial Market Dealers Association (FMDA) gave this indication in its monthly economic report for August, obtained at the weekend. According to the report, banks’ deposit and lending rates increased slightly in August.

It showed that savings account figures attained an average of 2.56 per cent, while other tenured funds ranged between 3.60 and 8.45 per cent for Overnight, to 365 days money.

For the lending rates, it showed that prime structured loans and normal structured loans stood at monthly average of 18.20 and 22.24 per cent respectively in August. However, on the average, deposit and lending rates were relatively stable recording a marginal change across maturities.
“Expectations are that interest rates may likely notch up slightly as DMBs adopt a cautious approach to guard against credit (default) risk from deficit units and improve net interest margin,” it stated.

At the treasury bills arm of the market, the report showed that the rate of return in the Primary Market Auction (PMA) trended south in the month under review when compared to the average rate of the previous month. This, it stated, narrowed the spread between the stop rates and 5-year low single-digit inflation figure as a fiscal guard against price stability and deficit financing.

Meanwhile, the central bank allotted N222.70 billion against N185.45 billion bills in July 2013. Subscription in the month rose to N576.38 billion, relative to N477.792 billion in the previous month, reflecting a 20.64 per cent increase.

On its outlook for the market in September, the report noted that despite the temporal pressure on the naira, it would continue to face stiff pressure in the near term given the downside risk of less predictable oil price movement and low crude oil output.

“The cut-down in asset purchase by the United States is likely to cause a rise in average yields of benchmark bonds as emerging economies move to protect their markets.

“Headline inflation is expected to move slightly north as we continue to record the longest sequence of single-digit inflation since June 2006 to May 2008 but remain below 10 per cent in the coming month as the year-on-year base year effect of the corresponding period is effaced accompanied with substantial higher prices levels in that period,” it forecast.

September 16, 2013