Double Whammy

Aug 26, 2008 (LBO) – Sri Lanka’s banks face challenging times with margins being squeezed as interest rates rise, a report by a stock brokerage said.

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“The last two quarterly earnings seasons have shown testing times for the Sri
Lankan banking sector,” SC Securities said in a research report.

It said the Central Bank was using ‘moral suasion’ to reduce credit growth while rising interest rates have impacted the industry in a “double whammy in terms of impacting consumer demand for credit and denting asset quality.”

The central bank has been trying to rein in credit growth which is partly responsible for raging inflation which hit a record near 30 percent earlier this year, economists said.

Inflation has begun to decline but is still the highest in the region, partly fuelled by loose monetary policy followed by the central bank earlier.

However, the central has now begun to tighten monetary policy and bring about lower credit growth in an effort to bring down inflation.

SC Securities said they