Context:
The overall spread between the weighted average lending rate (WALR) and weighted average domestic term deposit rate fell to 2.71% in March 2025, a 10-year low, down 5 bps month-on-month (M-o-M). Spread on fresh loans fell sharply by 22 bps to 2.7% during the same period.
Weighted Average Lending Rate (WALR)
The Weighted Average Lending Rate (WALR) is a key financial metric that reflects the average interest rate at which a bank lends to its borrowers, adjusted for the size of each loan.
Key Features of WALR
Definition and Purpose
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- Represents the average interest rate on all outstanding loans.
- Weighed by loan size, making it more accurate than a simple average.
- Larger loans influence the WALR more than smaller ones.
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Calculation
- Involves aggregating all loans by size and interest rate.
- Formula: WALR=∑(Loan Amount×Interest Rate)∑Loan Amount\text{WALR} = \frac{\sum (\text{Loan Amount} \times \text{Interest Rate})}{\sum \text{Loan Amount}}
Characteristics
- Dynamic metric: Changes as loans are added, repaid, or modified.
- Reflects loan portfolio composition and prevailing interest rate trends.
- Includes all types of loans – retail, corporate, etc.
Applications
- Used to:
- Compare lending rates across banks.
- Assess competitiveness in the lending market.
- Gauge transmission of monetary policy by central banks.
- Monitor sector-specific trends (e.g., retail or SME lending).
Regulatory Relevance
- Used by regulators to assess:
- Effectiveness of policy rate changes.
- Credit market dynamics.
- Cost of borrowing across the economy.
Implications
- A lower WALR indicates:
- Cheaper credit availability
- Higher competition among banks
- Changes in WALR directly impact:
- Borrowing costs for consumers and businesses
- Bank profitability
The weighted average domestic term deposit rate (WADTDR)
The weighted average domestic term deposit rate (WADTDR) is a metric that reflects the average interest rate paid on term deposits by commercial banks, adjusted for the size of the deposits. It essentially provides a weighted average of the interest rates on different deposit maturities and amounts, considering the relative importance of each deposit in the bank’s overall deposit portfolio.
