What is the weighted average interest rate on loans?

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

For the normal functioning of the company, it always needs sources of financing. In addition to own assets, borrowed funds, such as loans from third parties, can also be used. However, each of the borrowers has the right to set their own interest rates on loans, which complicates the assessment of the cost of the organization's loans. It is in such cases that such an indicator as the weighted average interest rate on loans is used.

Concept

The concept of the weighted average rate can be interpreted in different ways, based on the level at which it is applied. For example, if we are talking about a specific financial institution, then the weighted average rate on loans is the average cost of all loans (andissued and received). In other words, the average value of an individual bank's loan portfolio. This indicator is considered within the organization to analyze the effectiveness of its financial activities.

If we consider the weighted average interest rate at the level of the entire banking system, then this term means the cost of loans taken and issued by all banks of the Russian Federation. It is used by the Central Bank to study the effectiveness and success of the country's banking system as a whole. In addition, the weighted average interest rate on loans of the Central Bank of the Russian Federation can be used as a criterion for assessing the dynamics of the promotion of a single credit policy of our state.

Types of loans

The calculation of the average interest rate arose from the need to conduct a general financial analysis of the organization's activities. But using the simplest indicator (arithmetic mean) it is impossible to make such calculations, since credit organizations work with different types of loans that are issued at different interest rates.

Loans come in:

• long-term;
• short-term;
• investment;
• negotiable.

Also, the weighted average interest rate can be calculated by the Central Bank separately for individuals and legal entities. These indicators are available for public use. For example, the weighted average interest rate on loans for individuals for a period of more than 365 days in December 2016 was 15.48%.

Why calculate the average cost of loans?

For the stable operation of banking organizations, they need to control their own liquidity. Liquidity is the real ability of assets to become easily transferable cash. This means that an asset is considered liquid if it can be sold at the market price in the shortest possible time.

When, when analyzing current activities, a financial institution finds that it is excessively liquid (has a lot of liquid assets), it needs to issue as many interbank loans as possible. Conversely, when liquidity is low, banks are forced to raise assets on the side.

Interest rates on loans for individuals and organizations are directly dependent on the golden rule of supply and demand. Therefore, the Central Bank of the Russian Federation constantly monitors the volume of lending operations by calculating the weighted average interest rate on loans. This makes it possible to quickly respond to changes in the financial market and, if necessary, reduce or increase the level of interest rates on interbank credit transactions.

What is included in bank assets?

To assess the liquidity of a bank, you need to know what is included in its assets. The assets of the bank are the resources of the organization that belong to it. Moreover, she has the right to dispose of them at her discretion. Bank assets include:

• net worth;
• balances on current accounts of individuals and legal entities;
• funds on deposit accounts of organizations;
• bank deposits of individuals;
• interbank and other loans.

When a bank falls out of balance and becomes too liquid, it simply loses its profits. Since free funds can be invested and receive a certain percentage of profit from them. However, during the time when the money just lay on the accounts, they did not work, but lay as a useless load.

Formula for calculating the weighted average interest rate on a loan

In order to correctly calculate the average cost of a loan portfolio, organizations use a special formula that differs significantly from a simple arithmetic mean. Since the cost of a loan depends not only on its interest rate, but also on its amount.

This formula looks like this:

SPS=∑(KP)/∑K, where:

• ATS – weighted average interest rate;
• K - loan balance;
• P - interest rate.

Calculation example

To understand how to use this formula, you need to put it into practice. Suppose an organization has three loans:

• for the amount of 15 million rubles at 10% per annum;
• for the amount of 10 million rubles at 8% per annum, while the organization has already paid 8 million rubles to the creditor;
• for the amount of 2 million rubles at 15% per annum, with a residual loan amount of 1.5 million rubles.

Knowing the formula, you can find out thatthe weighted average interest rate on loans provided by the company is:

SPS=(150, 1+80, 08+1, 50, 15)/(15+8+1, 5)100%=0, 097100%=9, 7%

At the same time, the weighted average rate may change if:

• company will receive another loan;
• the interest rate on any of the current loans will change;
• the company will make full or partial repayment of loan obligations.

Weighted average interest rates on loans in rubles are similar to foreign currency loans. But since the analysis of financial activity is carried out only in national currency, it is necessary to take into account the exchange rate of the Central Bank at the time of assessing the loan portfolio.

How to reduce the average interest on loans?

To make the most efficient use of borrowed funds, it is necessary to keep the weighted average interest rate at the lowest possible level. To do this, you need to follow some rules:

1. Take out loans only at the lowest interest rate.
2. Repay loans with the highest interest rates first.
3. If the interest rate has increased during the loan term, you need to restructure or refinance the loan.
4. Make a debt repayment schedule, taking into account that only low-interest loans should remain open at the end of the term.

Weighted average interest rates on loans provided by credit institutions within oneenterprises must be kept under constant control. This will help you manage your company's resources efficiently and keep your company running at peak efficiency.

The same rule applies to the cost of all credit resources in the country. After all, the efficiency of the entire financial system of the state depends on the weighted average interest rate. However, we will leave this responsibility to the Central Bank, which copes with it perfectly.