CB undertakes comprehensive review on banks’ fees and commissions

Various fees and commissions levied by banks on customers are currently under review by the Central Bank, as complaints by customers on such continue to mount, Mirror Business learns.  

The Central Bank has undertaken the study after receiving complaints by certain parties on the fees levied by the banks on borrowers when settling a facility prior to the end of its tenure. The fee often referred to as the ‘pre-settlement charge’ in banking parlance is not unusual, as a bank loaned that money foregoing an opportunity to either loan that money to a different customer or invest elsewhere.

Banks generally match their assets with liability or in other words, their loans with deposits with similar tenures to avoid or minimise maturity mismatches. 

An early settlement of a loan creates a mismatch in such maturities and its impact could be higher when a larger section of a portfolio gets settled before its maturity date. As interest rates in the market have slumped to their lowest, people tend to refinance their facilities by borrowings at lower interest rates to settle a higher interest rate loan between different banks, triggering sometimes a hefty 
pre-settlement fee. 

There was a call to do away with that fee but the Central Bank has decided to undertake a full review of the entire fee and commission structure of the banking sector before reaching any decision.  The Central Bank said that it is talking with the Sri Lanka Banks’ Association to see if the industry is in a position to provide some relief on that front. 

However, a final decision on the pre-settlement fee will be announced after the entire study is conducted on the industry’s fee structure. 

Fees and commission incomes of banks took a blow during 2020, as waivers were extended on borrowers as part of pandemic relief. Subdued growth in business volumes, particularly loans, also affected such incomes negatively, as most fees are connected to lending. 

However, one bright spot emerged during 2020, as digital banking fees soared during the year, as large swaths of consumers on-boarded banks’ digital platforms for their various banking requirements. 

Further, as most of their physical branches remained closed or below normal levels, the banking sector saw their cost bases falling sharply as seen from their lower cost-to-income ratios. But some complain that benefits didn’t get, at least partly, passed on to the consumer as customers continue to be slapped with various types of fees, sometimes even without their knowledge.

As margins have compressed with all-time low interest rates, some of the banks may be attempting to make up for the lost incomes through fees and commissions. 

However, the ongoing study by the regulator on the fee structure could address such issues if such practices are carried out.