Banks forewarned against further delay in slashing lending rates

• Data shows clear disconnect between deposit and lending rates in response to cut in policy rates 

The Central Bank yesterday cautioned the country’s banks of taking potential administrative measures for failing to pass on benefits of the fastest monetary easing cycle in the history, amid concerns of limited reduction in lending rates.

“We will not hesitate to take some administrative measures to influence the bank lending rates to move in the normal interest rates structure,” Central Bank Governor Dr. Nandalal Weerasinghe said after slashing policy rates by 200 basis points on top of another 250-basis point rate cut in June.

Despite the easing financial conditions since the beginning of the year, even before the cut in the policy rates, banks were seen disproportionately cutting the deposit rates while the lending rates moving only slightly. 

Deposit rates came down by 6 to 8 percent no sooner the June 1 policy rate cut, but the lending rates moved by only a few basis points while much of the lending to small businesses and individuals still done at well over 20 percent, generating massive margins for banks.

Banks at the beginning of every rate cycle usually engage in this game of delay in adjusting rates of either deposits or loans, depending on what benefits them given the direction of the rates.

When the rates were shooting up last year, banks in no time jacked up lending rates but the same urgency wasn’t shown for the deposits. 

But when the cycle changes its direction, they do the opposite to make the most amount of profit by taking the benefit of expanding the interest margin.  

Dr. P.K.G Harischandra, Director, Economic Research of the Central Bank, too weighing in on the matter showed the disconnect between the pace of the decline in interest rates between the deposits and loans by banks. 

While there is further space for rates to come down, he said, “lending rates haven’t come down as fast as the decline seen in the deposit rates”.

In the 2018 monetary easing cycle, the Central Bank had to slap rate caps on certain select lending categories to force banks to bring down lending rates.

However, banks would be given some reasonable time to adjust as they too have issues with the cost of funding due to the deposits they raised in the recent past at higher rates. 

But Central Bank will closely monitor how fast banks would adjust their lending rates to pass on the benefits of easing financing conditions to the economic actors. 

“The economy and its stakeholders are expected to benefit from such easing of monetary conditions,” the monetary policy statement released by the Central Bank said yesterday.

“Therefore, the banking and financial sector is urged to pass on the benefits of this significant easing of monetary policy by the Central Bank to individuals and businesses, thereby supporting economic activity to rebound in the period ahead,” it added.