Hitherto, individual banks had their own base rates which served as the minimum rate that they could lend to their customers. This was based on a model that was developed by the central bank in association with banking experts within the industry and the Ghana Bankers Association (GBA).
This included market-based rates as well as specific bank information. Nearly 5 years after its implementation, the pass-through effects of market indicative rates to lending rates were still low and slow as well. Changes in say the Central Bank’s Monetary Policy Rate (MPR) and 91-Day Treasury Bills (TBR) had practically little to no effect on overall lending rates.
The BoG introduced the GRR as a uniform reference rate for all lending activities of commercial banks with the hope that lending rates will be more responsive to market rates than before. One year after its implementation, I attempt to examine what its effects have been on Lending rates and what to expect in the short to medium term.
The GRR is based on a market-based model that comprises three market rates; Monetary Policy Rate (MPR), Interbank rates (IBR) and 90-day T-Bill rate (TBR). These rates are weighted 40% for MPR, 20% for IBR and 40% for the TBR to obtain the GRR. The TBR is however adjusted with the BoG cash reserve requirement and the Cash-in-vault ratio.
The GRR is computed and published by the central bank every month in consultation with the GBA. Unlike the previous model where the base rate was the minimum lending rates for banks, the GRR is only a reference rate and banks are required to either add or subtract a risk premium which is their assessment of customer specific risk. This implies that banks can lend below the GRR if they find it commercially prudent to do so.
Commercial banks are also required to reset lending rates on their existing flexible or floating rate loans after each month’s publication of the GRR which means that in any month where there is a significant change in any of the market rates, lending rates on existing facilities will be impacted immediately in the following month.
The central bank announced the first GRR in April 2018 as 16.82%. This was significantly lower than the previous month’s average base rate used by banks based on the previous existing model. This was about 750 basis points (bps) lower (24.36% against 16.82%).
Average lending rates before the implementation of the GRR was about 29.80 % which meant that the average lending margin relative to bank base rates was about 5.44%. With the introduction of the GRR, margins relative to the GRR was going to be almost 13%. Clearly, this wasn’t going to be sustainable and banks were going to be pushed by customers (especially large corporate firms) to reduce lending rates.
Lending rates dropped by almost 300 bps between March 2018 and October 2018 from 29.8 % to 26.84%. The GRR within the same period only dropped by barely 70 bps, suggesting that the decrease in lending rates is largely driven by the effects of the new regime (i.e. GRR). This I believe is probably the largest drop in lending rates within a short period of time (barely 7 months).
While the 300bps is less than half the 750bps change in base rate under the new regime, it is very much expected that the pass-through effects of such changes are not 100%. What we have had within the period reflects what the market believe is the right adjustment needed to bring lending rates down. Margins relative to the GRR have dropped from about 12.5% to 10.7% shrinking by about 180bps. This is still much higher than the margins in the old regime which was about 5%. This is expected as the new model doesn’t account for specific banks factors that use to be priced into base rates which will now form a part of bank margins.
The GRR kept decreasing although on a marginal basis up until November when it started increasing. The increase in the GRR was largely due to the steady rise in the 91-day TBR. The TBR has seen a consistent steady increase since August 2018 from 13.10% to 14.70% in February 2019. It has however stabilised since February 2019, reflecting a shift back to foreign financing of the budget after the latest issuance of the Eurobond.
The Month-Month increases in the GRR in the months of November 2018 (21 bps) and December 2019 (26bps) sent a troubling signal to banks who responded pretty quickly with more than proportionate increases in lending rates as evident in the Month-on-Month increases in lending rates for the months of January 2019 (48bps) and February 2019 (40bps). The Central Bank within this period has sort to decrease its Monetary Policy Rates ostensibly to offset the increases in the TBR and to keep the GRR stable. Lending rates have marginally declined from 27.8% in February 2019 to 27.7% in April 2019.
There have been recent calls for bank lending rates to go down further, but I contend that they will be no such thing without the GRR going down further. The GRR over the year has remained fairly stable with very little variation largely because its components have remained fairly stable too. While the MPR has declined by 200 bps from 18% to 16% over the year, TBR has increased by about 140bps practically offsetting any major effects from the MPR.
Bank lending rates have now adjusted to reflect the market rates and will only be pushed further if there are significant changes in the GRR. This is evident in the trends observed in its movements relative to the GRR after October 2018 when the GRR started to trend upwards and its recent show of decline after the GRR started to in March 2019. I do not foresee any sharp declines in the GRR as we move to an election year in the next couple of months when the government will be expected to increase their expenditure leading to inflation continuing to trend upwards. The Central bank will at best continue to keep its MPR at its current levels and TBR will most likely trend upwards again leading the GRR to follow suit. If industry expects further drops in lending rates then it won’t happen anytime soon.
The writer is a Doctoral Researcher, Financial Analyst, Project Management Specialist, and a former banker.
(Selorm) | 
(Nana Kwesi)