CB says will slap lending rate caps on errant banks

From left: CB Deputy Governor S. R. Attygalle, CB Governor Dr. Indrajit Coomaraswamy and CB Senior Deputy Governor. Dr. P. Nandalal Weerasinghe.  
Pic by Waruna Wanniarachchi

• Notes gap between deposit and lending rates has widened
• Stresses banks won’t be allowed to make undue profits by keeping rates high
• To set timelines for each bank to reduce lending rates
• Urges banks to make transitional shift with current low inflation 
• Hopes higher NPL rate to come under control with lending cuts 

By Nishel Fernando 

While insisting that high market lending rates are choking the economy, the Central Bank last week warned that lending caps would be imposed on banks on individual basis, if they fail to bring down their lending rates.

According to the Central Bank, banks have reduced their interest rates for new deposits by 2.6 percent since the Central Bank introduced interest caps on deposits, while a significant portion of their existing deposits also have been re-priced. However, Central Bank Senior Deputy Governor Dr. P. Nandalal Weerasinghe pointed out that lending rates for prime customers (Average Weighted Prime Lending Rate) has come down only by 1.6 percent while the lending rates for other customers (Average Weighted Lending Rate) has come down by a marginal 0.25-0.3 percent. “If the banks are not bringing down the lending rates, it means they are increasing their margins. 

They shouldn’t make undue profits because of our intervention. Otherwise, we would be penalising the depositors by allowing banks to make extra profits. That’s not clearly the outcome we want to have,” Central Bank Governor, Dr. Indrajit Coomaraswamy said.

Hence he said the Central Bank has taken a firm decision to impose lending caps on individual banks if they fail to drive down the lending interest rates significantly. 

“We will talk to each bank and work out a timeline with set targets. If they don’t meet those targets, then we are going to impose lending caps,” he stressed. 

Although the Central Bank doesn’t favour imposing caps of any nature, which distorts the markets, Dr. Coomaraswamy noted that they would have to reluctantly impose lending caps, if the banks failed to bring down the rates.

Dr. Weerasinghe emphasised that the banking sector must make a transitional shift to a low interest rate regime with the current low inflation environment under the Central Bank’s flexible inflation targeting framework.

He blamed high lending interest rates for diminishing demand for private sector credit. 

“The inflation has been around 5 percent on a persistent basis, while the economic growth is around 3-4 percent,  which means the nominal growth for businesses is around 9 percent. Hence, it’s extremely difficult for any business to service loans with current market interest rates of 15-16 percent,” he elaborated. 

Dr. Weerasinghe opined that the lending rates for prime customers need to come down to 8-9 percent and 10-12 percent for other customers based on the risk factor, similar to other countries which have mid-single inflation rates. 

He emphasised that such a cultural shift in the financial sector is crucial for businesses to become profitable and to expand their businesses. 

“These structural issues are choking economic activities. There’s no way for real interest rates to be so high. This transition has to take place. Otherwise, it would be extremely difficult to get the economy going again,” Dr. Coomaraswamy said. 

Commenting on the banking sector’s non-performing loan (NPL) ratio of 4.6 percent, Dr. Weerasinghe was optimistic that once lending rates fall to proper levels, the NPL levels will subside accordingly.

‘Extremely unlikely’ to cut rates before year-end polls

(Jaffna) REUTERS: Sri Lanka’s Central Bank is extremely unlikely to reduce its key monetary policy rates before presidential elections expected to be held before Dec. 9, its chief Indrajit Coomaraswamy told Reuters yesterday.

In a surprise move, the Central Bank slashed the key rates by 50 basis points on Friday to stimulate sluggish growth that is expected to hit nearly two-decade lows this year. “It is extremely unlikely there is going to be any rate decrease in the coming months,” Coomaraswamy told Reuters over the phone.

“I can’t see a rate decrease before the election because it is generally not good for a Central Bank to change interest rates once elections are announced, because it is construed for or against the government,” he said.