The Central Bank will soon issue directions for banks to follow the market lending rates, Governor, Central Bank (CB), Dr. Indrajit Coomaraswamy told the Sunday Observer.
The move comes following CB’s consultations with the banks. Deposit rates have dropped by about 2 percent, however, borrowing rates have come down only by 0.5 percent. Although deposit interests were brought down by the Central Bank certain banks are yet to bring down their interest rates on lending. Interest on lending has been brought down only by half a percent forcing the banking institutions to meet the difference.
Dr. Coomaraswamy explained that Sri Lanka has suffered an inflation of about 3.4 percent, while the growth is 3.1 per cent. He added that the nominal growth is 6.5 percent whereas Sri Lanka’s average lending rates are about 14 percent. “You cannot do business this way,” he said.
“We have now brought down the deposit rates. We are telling them (the banks) to bring down the lending rates as well. We will give them a framework on the lending rates, and once the rates come down we will take the ceilings off,” Dr. Coomaraswamy said.
The deposit cap was introduced in April. As the banks survive on fixed deposits with a maturity structure of up to a year, the process would take time. The Central Bank will soon set a timeline.
“The number of Non-performing loans of banks are reducing. They pay high taxes, usually over 50 percent.
They are also bearing the brunt of the moratorium for the tourism sector. However, we think they can reduce the interest rates by about two percent,” Dr. Coomaraswamy added.
Meanwhile, the State Minister of Finance Eran Wickramaratne said the banks had enough time to get adjusted to the new lending rates.
“The CB enforced a cap on the interest of deposit rates, so that the cost of funds for the bank is low. Simultaneously, the cost of borrowing for individuals and businesses also should reduce. The benefit would then be passed on to the borrower” he said.