…as CBN specifies cost elements forÂ Â interest rate pricing
By Babajide Komolafe
Banks are reviewing their prime lending rates downward to reflect the crash in deposit rates from 11 per cent to three per cent Vanguard survey has revealed.
The Central Bank has also specifiedÂ theÂ cost elements to be used by banks in computing interest ratesÂ under the new interest rate pricing model announced on April 15th. Each bank is now required to show how it arrived at its lending rates which must be published beginning from June.
Vanguard survey of bank lending rates showed that five banks namely Zenith, Oceanic, Stanbic IBTC , Citibank and Skye banks have slashed their lending rates to prime customers in the manufacturingÂ sector by 41Â per cent on the average between November 2009 and May this year. But two banks namely Unity Bank and Ecobank from the survey however had average lending ratesÂ by 16.5Â per cent to prime customers in the manufacturingÂ sector during the same period.
A detailed analysis of banksâ€™ deposit and lending rate as published by the Central Bank of Nigeria (CBN) last week confirmed the Vanguard survey and showedÂ that Zenith Bank slashed its prime lending rateÂ to the manufacturing sectorÂ by 80 per cent, Stanbic IBTC by 36.8 per cent, Oceanic by 36.4 per cent, Citibank by 27.7 per cent, and Skye Bank by 22.7 per cent.
On the other hand Unity Bank prime lending rates to manufacturers rose by 19 per cent while Ecobank increased moved up by 14 per cent.
In real terms Zenith Bank prime lending rate to manufacturers stood atÂ 4.26 per cent. For Stanbic IBTC, the prime lending rate dropped to 14 per cent from 22 per cent while that of Oceanic dropped to 16 per cent from 25 per cent. Citibank also reduced its prime lending rate to 13 per cent from 18 per cent while for Skye Bank the prime lending rate dropped toÂ 17 per cent from 22 per cent.
According to the survey result other banks that reduced their prime lending rate to manufacturers are First Bank, which prime lending rate dropped from 22 per cent to 18 per cent, Sterling Bank from 20 to 16 per cent, Union Bank from 20 to 16 per cent, Finbank from 21 to 18 per cent. Others are Spring Bank from 21 per cent to 19 per cent, Standard Chartered Bank from 18 per cent to 16 per cent, Wema Bank from 18 per cent to 16 per cent, Access bank from 18 per cent to 17 per cent and FCMB from 18 per cent to 17 per cent.
Eight other banks however kept their prime lending rates to manufacturers stable. These are Afribank (18 per cent), Diamond Bank (20 per cent), Equatorial Trust Bank (18 per cent), Fidelity BankÂ (19 per cent ), Bank PHB (19 per cent) and UBA (15.5 per cent).
Unity Bank and Ecobank raised their prime lending rates to manufacturing sector during the period. Unity Bank raised its rate to 26.25 per cent from 22 per cent, while Ecobank raised its rate to 16 per cent from 14 per cent.
For the industry, prime lending rate to manufacturers dropped by 12.4 per cent to 16.91 per cent from19.3125 per cent in November.Â Maximum lending rate offered to industry dropped by 5.7 per cent to 22.13 per cent from 23.449 per cent in November.
From the survey Zenith Bank emerged with the lowest prime lending rate of 4.26 per cent, followed by Citibank (13 per cent), Stanbic IBTC (14 per cent) and UBA (15.5 per cent). Unity Bank emerged with the highest prime lending rate of 26.25 per cent followed by Spring (21 per cent) and Diamond Bank (20 per cent). The above indicate that lending rates are still high in the industry with only prime lenders enjoying marginal reductions in rates.
Meanwhile, the CBN has specifiedÂ theÂ cost elements to be used in computing interest rates by banks under the new interest rate pricing model announced on April 15th.Â AlsoÂ banks are mandated to disclose these cost elements to customers by publication via newspapers or their website or any regular periodical.
The cost computation under the new interest rate pricing model was conveyed to banks via a circular signed by the Director, Banking Supervision, CBN, Mr. Samuel Oni and titled, â€œThe Need for Banks to Develop and Implement a Risk-Based Pricing Model.
The circular stated, â€œThe Monetary Policy Committee, at its special meeting of April 15. 2010, reviewed developments in the economy during the first quarter of 2010 and noted with concern the persisting high lending rates, it attributed the resultant wide spread between lending and deposit rates to inefficiency in cost management and unrealistic profit expectations and targets on the part of the shareholders of banks.
The Committee believes that promoting transparency in the pricing and setting of rates by Deposit Money Banks (DMBs) could help to drive down lending rates, In this regard, DMBs are requiredÂ to develop all inclusive risk-based interest rateÂ pricing model and forward same to the CBN. DMBs are expected to quote lending rateÂ as fixed spread over Monetary Policy Rate (MPR)Â or any reference rate as may be determined by the CBN. TheyÂ are required to render monthly returnsÂ on, and regularly publish (on a website, newspapers, and other periodic reports) showingÂ the relationship between the MPR and their prime and maximum lending rates.
The articulation of the pricing model in this mode and its disclosure to general public is intended to serve two purposes. First, by providing visibility on relative efficiency of financial institutions, banks will be encouraged to seek profitability by driving down costs and charging competitive rates rather than charging excessive rates ofÂ interest.
Second, by explicitly stating prime and maximum lending rates as a fixed spread over MPR, the policy rate becomes an effective tool for driving lending rates up or down as policy stance dictates.
Banks are advised to be guided by the following parameters, in addition to the risk premium, in determining their prime lending rates. Each of the cost element or component as described below should be separately computed and disclosed as part of the information to be made public.
Direct Cost of funds:- Direct
interest cost of funds should be interest expense related to the monthly average volume of deposits and other funds reported to the CBN on a monthly basis.
Indirect cost/overhead:- Ail indirect cost/overhead incurred by the bank should be included in the determination of the prime lending rate. The overheads to be separately disclosed include staff cost, bonuses, executive compensation, loan loss provision, administrative cost, etc. Overhead cost forÂ the month should be expressed as a percentage of the average volume of funds and annualized.
Statutory cost:- Statutory cost to be included in the computation of the prime lending rate should include the following:
The amount payable as deposit insurance premium in each month should be expressed as percentage of the average volume of deposits for the month and annualized
Cash Reserve Requirement (CRR).
Banks are expected to adjust the prime lending rate by taking into account the opportunity cost of deposits that were sterilized as CRR.
Opportunity Cost:-Â Of holding liquid assets In excess of the minimum requirement
Without prejudice to the maintenance of strong liquidity position, banks are encouraged to balance the desire for liquidity and profitability. The opportunity cost here will take into account the bankâ€™s average yield on earning assets other than liquid assets vis-a-vis the average yield on liquid assets.
Cost of holding non-earning assets:- This is the cost of holding assets that do not generate any income. Banks are advised to reduce their holding of non earning assets to the minimum.
Target return on equity:- The rate of return expected by the shareholders of banks should also be factored in the computation of the prime lending rate of banks. The expectation however, should be guided by economic fundamentals and long term sustain ability of the institutions.
Flat Fees:-Â To ensure standardization of charges across the industry and align Nigerian banking practice to international standards, the Bankers Committee issued the Guide to Bank Charges in 2004. Banks were required to ensure compliance with the provisions of the Guide, however, in recent times, the CBN has observed the proliferation of flat lending fees charged by banks in violation of the Guide, which has led to many complaints by members of the public . To arrest this situation banks are henceforth required to note that aggregate flat lending of the facility amount.
TheÂ details of all fees shall be communicated and agreed with the borrower and disclosed by the bank.Â Â The returns as highlighted above shall, with effect from April 2010, be rendered on the 5m day following the reporting month.â€