CB requests banks, NBFIs to cut lending rates

• An attempt to prop up sluggish growth that could worsen by Easter Sunday bombings
• Says SL’s lending interest rates be excessive in comparison to other regional economies 
• SL’s private credit grew just Rs.8bn in February after contracting Rs.4.3bn in January

The Central Bank has requested all licensed banks and non-bank financial institutions (NBFIs) to reduce lending rates to increase credit flows to the real economy in an attempt to prop up the sluggish growth, which is expected get further hindered following the Easter Sunday bombings. 

The Central Bank in a media communiqué on Saturday said it requested all banks and NBFIs to cut interest rates on deposits and reduce interest rates on lending products in general with a special emphasis on lending to small and medium enterprises (SMEs).

The Central Bank said it has observed high interest rates charged on lending products and excessively high interest rates offered on deposit products by banks and NBFIs despite measures taken to bring down overnight interest rates and enhance market liquidity through the reduction of Statutory Reserve Ratio (SRR).

“Especially in the context of well contained inflation and inflation expectations, Sri Lanka’s interest rates in real terms also have been found to be excessive in comparison to other regional economies,” the Central Bank said.   

However, banking sector sources said the non-payment of dues by the government on the senior citizen interest subsidy scheme for over 10 quarters has been major reason for the banks to maintain higher lending interest rates.

In 2015, the government introduced a 15 percent subsidized interest scheme for fixed deposits up to Rs.1 million maintained by citizens over the age of 60.

The government is expected to pay the difference between the 15 percent and the market standard interest rate offered by commercial banks. The Rs.1 million threshold was increased to Rs.1.5 million in 2017.

Meanwhile, the Central Bank said interest rates on savings and other deposits with tenures less than 3 months offered by licensed banks and NBFIs will be linked to the Standing Deposit Facility Rate (SDFR), while longer tenures will be linked to the 364-day treasury bill rate.

“Licensed banks and NBFIs may offer an additional interest rate up to 50 basis points for savings deposits of children under the age of 18 years, and for Fixed Deposits (FD) of senior citizens with tenure of one year or more,” the Central Bank said.  

Debt instruments issued by NBFIs will also be subject to maximum interest rates. 

In spite of these measures, the Central Bank said the interest rates on deposits are expected to remain competitive, providing a substantial real return to depositors.   
Through these measures, the Central Bank expects the lending rates to reduce by around 200 basis points to the SMEs in the near future.
 

“The reduction in SRR by 250 basis points in two steps in November 2018 and March 2019 has already reduced cost of funds and is expected to result in a narrower margin between deposit and lending rates.” 

The Central Bank said they will closely monitor the behaviour of interest rates of licensed banks and NBFIs on both deposits and loans and take further measures as appropriate in future.
Sri Lanka’s growth slowed to 3.2 percent in 2018 from 3.4 percent in 2017. The Central Bank expects the growth the pick up to 4 percent this year. 

However, the last week’s terrorist attacks on three city hotels in Colombo have delivered a deadly blow to the country’s booming tourism industry, and the Finance Ministry estimates arrivals to fall 30 percent and the country to lose US $ 1.5 billion in tourism earnings. 

Sri Lanka’s private credit grew just Rs.8 billion in February after contracting Rs.4.3 billion in January.

Banking sector credit quality faltered notably in 2018 with the slowdown in economic activities, and the adoption of new accounting standards in the latter part of the year.