Tighter Margins

Oct 12, 2010 (LBO) – The efficiency in Sri Lanka’s banking system can be improved with interest margin tightening at least 150 basis points over the next nine months to 5.0 percent with banks remaining profitable, Central Bank Governor Nivard Cabraal said. Profits are needed to build capital to buffer deposits.

“About a year ago the overall intermediation cost was as high as 10 percent, one of the highest in the world,” Cabraal told the annual sessions of Sri Lanka’s Institute of Certified Professional Managers.

“Now it is down to about 6.5 percent. But we believe there is even more space to tighten that further. If we see a level of around 5.0 percent in the next few months I think that would be the rate we would be looking at.”

Structural

In countries with high reserve ratios – which is the portion of deposits that has to be kept in the central bank – margins can be be high, as the cost of holding non-interest bearing reserves is passed onto depositors or borrowers.

Sri Lanka’s reserve ratio was lowered to 7.0 percent from 10.0 percent in a series of cuts from October 2008 to February 2009 as the banking system ran out of liquidity in a balance of payments crisis.

A government that gets printed money from a central