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By Dilina Kulathunga
The Central Bank (CB), disturbed by the massive excess liquidity lying with the banking sector without productive usage, yesterday contained access to the Standing Deposit Facility (SDF) by Open Market Operators (OMOs), in an obvious move to push banks to cut lending rates.    

SDF is a window available for the OMOs to park their excess liquidity at infrequent intervals to tide over temporary liquidity excesses, but several commercial banks appeared to have abused the facility placing these excess funds with the CB under its SDF window on a continuous basis.

"We see so much liquidity remaining in the system without being utilised for economic activity. With this move we expect banks to lend at cheaper rates"

Therefore the CB, in quite an unusual move contained access of OMO participants to the SDF of the CB at the current SDF rate of 6.5 percent to a maximum of three times per calendar month and any times more than that at 5 percent per annum.

The monetary policy action was effective from yesterday and for the remainder of this month the access to OMO at SDF will be limited to twice per participant.     
“We see so much liquidity remaining in the system without being utilised for economic activity. With this move we expect banks to lend at cheaper rates,” CB governor Ajith Nivard Cabraal was quoted to have told Reuters.

As of 2014 first half end, Sri Lanka’s banking sector excess liquidity remained at a high of Rs.280 billion.

The daily auction facility was also suspended with effect from yesterday until further notice.

Meanwhile, the monetary board decided to keep existing key policy rates unchanged for the ninth consecutive month. Therefore the SDF will remain at 6.5 percent and the Standing Lending Facility Rate (SLFR) at 8 percent.

Having reduced the key rates by 125 basis points from December 2012 through January 2014 and imposing targeted measures such as 200 basis point cut in statutory reserves ratio and also reducing penal interest rates by the CB, Sri Lanka’s banks remained stubborn showing very little flexibility to the above actions.
Sri Lanka’s private credit growth slowed to 2 percent in June, lowest from April 2010 falling from 2.2 percent in May 2014.

“The Monetary Board is of the view that above measures would actively encourage commercial banks to utilise the substantial amounts of excess liquidity to enhance the flow of bank credit to the private sector at more reasonable interest rates, and thereby support the growth momentum of the economy, given the low inflation environment,” CB said releasing the September monetary policy update.

Meanwhile, CB said it was confident of achieving 7.8 percent economic growth and maintaining inflation “comfortably at around 3-4 percent for 2014” less than the targeted 4-5 percent.