CB tells non-compliant banks to align interest rates with October targets

4 December 2023 03:14 am Views - 171

• Says 14 banks have complied with October targets and 10 yet to comply
• Will be forced to take “certain actions” if not complied - CB Governor
• In a directive in August, CB asked banks to cut lending rates by 250 bps and a cumulative 350 bps by end of Oct. and Dec.

 

Banks, which have not yet aligned their interest rates with the October targets, have been explicitly notified to

Dr. Nandalal Weerasinghe Pic by Nisal Baduge

promptly make the necessary adjustments, the Central Bank said. 
The rest have been instructed to meet their December-end targets, as the Central Bank diligently follows up on the targeted measures announced a couple of months ago to expedite the transition of the monetary policy.

While lowering the ceiling rates on select lending products, the Central Bank in August issued an order asking licensed banks to cut their rupee lending rates by 250 basis points and a cumulative 350 basis points by the end of October and December this year from the levels in July end in line with the ease in the key policy rates. 
The Central Bank imposed fresh ceiling rates of 18 percent, 23 percent and 28 percent respectively on pawning, pre-arranged temporary overdraft facilities and credit cards. Penal rates were also confined to 200 basis points per annum.

While the majority of banks have aligned with monetary easing by lowering their rates, a segment remains non-compliant or has been slow to make the adjustments. The Central Bank has asserted its willingness to take a stringent stance on 
such holdouts.

“We have looked at it till the end of October. Fourteen (banks) have complied but 10 haven’t reached that level,” the Central Bank Governor Dr. Nandalal Weerasinghe said.
“But we have informed those who haven’t met the parameters to bring them down to the levels forthwith and further down by December 31. Or else we will be forced to take certain actions,” he added. 
Despite back-to-back outsize rate cuts starting from June, there has been a sizable disconnect between the pace of the decline in the deposit rates versus the lending rates as the former was quick to decline but the latter was lagging. 

This prompted the Central Bank to take targeted measures to force banks to bring the lending rates down to a level commensurate with the decline in the policy rates. 
The Central Bank in November cut its policy rates by 100 basis points, bringing the cumulative decline in key policy rates to 650 basis points from the levels in May. 

After slashing policy rates, the Monetary Policy Board stressed the need for swift, sizable and broad based pass-through in the market rates.
Specifically, they highlighted the importance of lowering lending rates for small businesses to revitalise the sluggish economy, stimulate job creation, generate income, and boost overall product output, ultimately contributing to the growth of the economy.