July 26, 2013 (LBO) – Sri Lanka’s central bank has capped the penalty interests on defaulted loans of banks to two percent a year and those from leasing and finance companies to three percent a year. The regulator said at the moment penalty rates on overdue advances range from 2 to 20 percent above the original loan rate in banks and 36 to 48 percent for above loan rate for loans in leasing and finance companies.
The central bank said the current rates were “excessively high.”
“¦[S]uch rates are an undue burden to overdue borrowers whilst also hindering
entrepreneurship development in the country,” the Central Bank said in a statement.
“The inability of borrowers to service their loans in the light of such high interest rates also has an adverse impact on the financial position of banks, finance companies and leasing companies, as well as financial system stability.”
The central bank said in some case the penalty rates were on the arrears only and at times on the whole loan.
While penal premiums on arrears of 20 percent appear excessive, it is not clear whether the benefit granted to defaulters will result in higher costs for other borrowers.
After the Central Bank