Banks base rate crushing

In its quest to find a lasting solution to the high base rate regime in the country, the central bank issued a directive for all banks to use a common formula in calculating their rates. Charles Benoni Okine & Suleiman Mustapha reports on the impact so far.

The high base rate regime which has characterised the banking industry in the last couple of years has begun crashing, though gradually.

This new trend comes on the heels of directives from the Bank of Ghana to banks to apply the new base rates in the pricing of their interest charges.

The revised Base Rate system replaced the existing Base Rate regime took effect from July 2, 2013.

In the last few days, the average interest rate which hovered around 30 per cent prior to the directive has dropped to between 22 and 24 per cent on the average.

For instance from 21.50 per cent, Societe General has advertised a new rate of 18 per cent which took effect from July. Bank of Baroda is also down from 17.95 per cent to 10.61 per cent while Barclays Bank is down from 18 per cent to 15.43 per cent while

The Bank of Africa has advertised a base rate of 25.57 per cent while the National Investment Bank also has 20.12 per cent advertised and it is supposed to take effect from July 15.

Standard Chartered Bank is also has a base rate of 16.66 per cent.

The Caveat

In spite of the good news to borrowers, the banks have a caveat to the new rates as against what they initially communicated to their customers at the time they were taking their loans.

For instance those that have advertised their new rates in the media said “Our new base rate is determined in line with the Bank of Ghana directives and applies to only new loans and advances. Existing loans and advances based on the old rate shall run till their maturity”.

Others also have it that “From now onwards the bank applies Bank of Ghana guidelines in compliance with Notice No BG/GOV/SEC/2013/03 which provides that banks shall determine their lending rates with reference to the new base rate and may include other customer specific charges as considered appropriate. The final rate to the customer will be base rate plus an applicable spread. This base rate is applicable only with no retrospective effect.

Meanwhile, the Graphic Business has learnt that at the time most of the borrowers were contracting their loans, they were made to understand that the rates would be adjusted depending the prevailing situation on the ground.

Base Rate Model

The new base rate model captures banks’ cost of funds, operational expenses, general provision for loan losses and a profit margin.

The revised base rate, according to the Bank of Ghana would be the minimum rate for all loans and advances that banks are not permitted to resort to any lending below the revised base rate.

The base rate system is applicable to all new loans from July 2, 2013 and existing loans that come up for renewal from that date.

Existing loans based on the old base rate regime according to the central bank shall run till their maturity.

 The Bank of Ghana also directed that weighted average of base rates of all participating banks should be used in syndicated loans.

 This means that the actual lending rates charged by a bank shall be transparent and consistent with its base rate and made available for supervisory review or scrutiny as and when required.

Rationale for directive

The revised rate was designed to bring uniformity in the in the determination of interest rates by commercial banks in the country and to ensure transparency in the pricing mechanism.

Banks are also required to display the information on their base rates at all branches and also on their websites.

Changes in the banks’ base rates are to be conveyed to the public through publication in leading Ghanaian newspapers. 

Bank customers, by the directive are to ascertain the additional interest rate (risk premium) banks may add to their borrowing rate to enable them compare what exist in other banks.

Effect of Treasury Bill

The issue about the rate at which the government was borrowing from the market (Treasury Bill) has also been one of the factors used by the banks to determine their base rates in the past.

Some of the banks on grounds of anonymity said it will be improper to pitch a base rate below the prevailing TB rate because it will result in heavy losses.

According to the banks borrowers might take the bank loans and invest in TB and make profits at their expense.