June 26, 2013 (LBO) – A two percentage point cut in Sri Lanka’s bank reserve ratio to 6.0 percent will lower costs, expand funds available to be given as loans, allowing banks to bring down lending rates, Central Bank Governor Nivard Cabraal said. But the greater benefit will in the ongoing intermediate cost reduction and the higher amount of funds from deposits that will be available for lending going forward, he said.
Banks will now have to place only 6.0 percent of the deposits raised from the public in the central bank as non-interest bearing ‘statutory reserves’ instead of the earlier 8.0 percent releasing more funds for lending.
The ‘reserve cost’ which adds to total intermediation cost keeps lending rates high.
“To some extent they have a problem because our SRR (statutory reserve ratio) is higher than many other countries,” he said.
“But we are bringing it to peer levels. We are removing an impending that the banks had.”
Countries like India and Thailand had rates of around 4.0 percent he said. The US no longer has a statutory ratio.