Ends interest rate caps and forced reduction in overall lending rates

• Repeals order on maximum rates as fall in rates makes it no longer relevant
• Allows unrestricted access to Standing deposit window as money market normalises

Gradually lifting some of the restrictions imposed on the financial sector, the Central Bank yesterday decided to end the interest rate caps and forced reduction in overall lending rates in the banking sector. Reason being the lending rates effectively coming down below the levels stipulated at the time.
To this end, the Central Bank said it would, with immediate effect, repeal the Monetary Law Act Order No.01 of 2023 titled Maximum interest rates on rupee denominated lending products issued in August last year.

The Monetary Board was compelled at the time to impose maximum rates on select lending products while offering time based targets to reduce overall lending rates by the banks, as the latter appeared long delaying the full pass through of the benefits of the ease in the monetary policy.
At the time, the Central Bank as per the powers vested in it by the Act, set maximum rates on pawning, pre-arranged temporary overdraft facilities and credit cards at 18 percent, 23 percent and 28 percent respectively.

Besides, they also ordered the banks to bring their other rupee lending rates down by a minimum of 250 basis points by October end and by a further 100 basis points by December end from the July end levels.
The order did not apply to those banks whose facilities were at 13.5 percent or less at the time of the order or thereafter.

Further, the penal interest rate was also capped at 200 basis points per annum for the amount in excess of an approved limit or in arrears, during the overdue period.
In repealing the order, the Monetary Board said they achieved the desired results from the order by way of bringing the overall market lending rates down. This will also help them to move away from the administrative measures towards market based instruments as the economy normalises.
Meanwhile, the Central Bank also removed the remaining restrictions on the access to the Standing Deposit Facility by banks, effective from April 1 in line with the improvement in the domestic money market activity alongside the improvement in liquidity conditions.

“This would further support market-based transmission of monetary policy adjustments”, they added.
Effective from January 16, 2023 through February 15, 2024, the Central Bank limited access by the licensed commercial banks of the standing deposit facility to five times a month while the access to the lending facility rate was restricted to 90 percent of the statutory reserve requirement of the bank at any given day.
This was then relaxed from February 16 to fully remove the restrictions on the standard lending facility, while the restrictions on standing deposit facility was relaxed to 10 times a month from the earlier 5 times.