Lower interest rates for bank deposits from this month

• CB orders banks to cut rates on deposits for second time since April
• Issues fresh reference rates applicable for deposits from July 1
• Small and medium-sized banks set to be biggest losers

Sri Lanka’s bank depositors will receive lower interest rates from this month as the Central Bank has pressed banks to cut rates for the second time since April, as the reference rates upon which banks price their deposits have fallen consistently.

The Central Bank first issued instructions capping the maximum interest rate that can be offered by banks on April 29, contingent on the behavior of the lower end of policy rates and the weighted average yield rate of the one-year Treasury bill rate plus or minus some basis points depending on the tenor of the deposit. 

The Central Bank last week issued fresh reference rates applicable to deposits, which were lower than the ones issued in end-April, effectively forcing down the rates offered on savings accounts, new deposits and renewals effective from the quarter, beginning from July 1. As a result, the depositors will receive not more than 7 percent for their savings account balances and fixed deposits with up to 3 months tenor. 

Meanwhile, for new fixed deposits and renewals with tenors from 3 months but less than 6 months will receive 8.33 percent. 

Interest rates for deposits with tenors of 6 months but less than 1 year will match the weighted average one-year Treasury bill rate of 8.83 percent 

For fixed deposits – newly placed and renewed ones— with one year tenor but less than two years will receive 9.83 percent, according to the new reference rates and earlier instructions. 
Based on the data gathered from published rates by the licensed commercial banks, many banks offer the ceiling rate or the maximum that they could offer under the price restrictions while the other offer near ceiling rates. This has led to a situation where the competition based on pricing has been killed completely while the banks will have to purely depend on their existing bank-client relationships and services to mobilize deposits. 

Under such a situation, small and medium-sized banks, which played on their pricing to garner deposits, are the biggest losers, according to banking sector analysts. 

However, if the published inflation numbers are to go by, depositors will still receive a positive real return. According to the Colombo Consumer Price Index for June, headline inflation for the month was recorded as 3.8 percent.  

If the inflation starts gaining steam due to the pickup in aggregate demand or sudden supply disruption, the Central Bank will have to abandon its price controls. In the meantime, savings accounts of children below 18 years of age and term deposits of senior citizens above 55 years will get 50 basis points above the ceiling rates. 

The Director of Bank Supervision Department at the Central Bank is expected to issue new reference rates quarterly.