Rate Impact

Oct 29, 2009 (LBO) – State banks were scrambling to give effect to an order to cut lending rates, but their balance sheets of state banks are likely to be hurt despite depositors taking some of the cost, officials said. Peoples’ Bank has a high proportion of pawning or gold backed loans.

Savings depositors in particular are likely to take the brunt of the burden of the decision.

“Banks are likely to immediately adjust savings deposits rates to partially compensate and progressively fixed deposit rates as and when they mature,” Wickremesuriya.

Market Power

State banks, which are active in rural areas, have paid rates as low as 5.0 percent when inflation was running close to 29.0 percent in recent years.

Because state banks are the biggest they have market power.

The Central Bank had now brought inflation down close to 1.0 percent, allowing all citizens, to get loans at low rates if government deficit spending which pushed rates up in the first place can be controlled.

Low inflation also means, depositors will not lose, as long as rates are above inflation.

But interest rates are determined b