Jun 03, 2019 (LBO) – Sri Lanka’s Monetary Board would need to consider whether they impose a lending cap if the banks are not cooperative enough to reduce the high lending rates, Central Bank Governor Indrajit Coomaraswamy warned.
The Central Bank recently imposed a cap on deposit rates with the intention of bringing down lending rates by about 200 basis points but so far the rates have come down only by 31 basis points.
“It is not adequate but it does take time because the cost of funds for the bank will begin to come down only with new deposits which are contracted at the lower rates; which have come into force after the imposition of the deposit cap,” he said.
“But in the coming weeks we anticipate that banks should bring down their lending rates significantly.”
The reduction in Statutory Reserve Ratio (SRR) by 250 basis points in two steps in November 2018 and March 2019 has already reduced the cost of funds and is expected to result in a narrower margin between deposit and lending rates.
The Central Bank said it observed high interest rates charged on lending products and excessively high interest rates offered on deposit products despite the measures taken to bring down overnight interest rates and enhance market liquidity through the reduction of SRR.
The Central Bank reiterates the banks to reduce interest rates on deposits enabling them to reduce their rates on lending products thereby enhance credit flows to the real economy.
“I'm sure the banks will be cooperative and we will see this reduction; if not clearly the monetary board would need to consider whether they impose lending cap as well,” he emphasized.
“Clearly there is a national problem now and everybody has to play their part.
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The interest rates on savings and other deposits with tenures less than 3 months offered by banks will be linked to the Standing Deposit Facility Rate whilst longer tenures will be linked to the 364 day Treasury bill rate.
As per the current directions, banks may offer an additional interest rate up to 50 basis points for savings deposits of children under the age of 18 years, and for fixed deposits of senior citizens with tenure of 01 year or more.
Debt instruments issued by non-banking financial institutions will also be subject to maximum interest rates.