Private commercial banks say they are keen to bring lending rates down but said it could take some time to do so cross the board, while dealers said Wednesday’s trading was speculative and volatile with the rupee strengthening to 116.80 against the dollar only to fall to 117/117.5O.

On Tuesday, President Mahinda Rajapaksa urged banks to bring down their lending rates in line with the easing of the Central Bank monetary policy stance. He also wanted them to help stabilize the exchange rate.

"Private commercial banks are keen to bring down their lending rates but it will take some time. All banks have taken deposits at higher rates of interest which will be valid for the next three to six months. Then, when the cost of funds come down we will be able see a broader reduction," Upali De Silva, Secretary General of the Sri Lanka Banks’ Association said.

"Banks have already begun to reduce their lending rates to certain sectors such as agriculture, small and medium industries and development related sectors," De Silva told the Island Financial Review.

The association has also placed a ceiling on unauthorized overdraft rates at 29 percent.

With Treasury bill rates coming down, industry sources say it is an indication that the biggest borrower, the state, is demanding less for rupees, leaving room for banks to attract more deposits and bring down their deposit rates which would result in a reduction in lending rates. Some banks have already revised their deposit rates twice over the past two weeks.

However, the slow response to the easing monetary policy by reducing lending rates has to do with the absence of quality borrowers to some extent.

"Some banks have an excess supply of rupees and they would like to lend but do not have enough borrowers to lend to.

"Times are hard and global and domestic economic conditions are not helping many businesses, so banks are looking for the borrowers they believe will be in a position to pay back the loans. There are not many businesses who can do so right now, and banks are naturally cautious," a dealer said.

He said this was why lending rates range between 22 and 23 percent at present. The high rates are supposed to act as a filter, attracting only the ‘good’ borrowers.

"However, banks are trying to bring down lending rates to about 17 to 18 percent," the dealer said.

The money market yesterday ended in a deficit liquidity position of about Rs. 6 billion which increased overnight rates to about 11.5 to 12 percent from a 9.5 to 10 percent level. The treasury bills auction also brought down rates marginally by about 2 basis points, dealers said.

Speculation…

Dealers said the foreign exchange market experienced volatility on Wednesday, driven by speculation and profit seekers.

"The rupee strengthened to about 116.8 against the dollar but this was only for a short time weakening to about to about 117.45 to 117.60. The market showed no reaction to the President’s statements and continued to be driven by speculation with no big import bills coming in," a dealer said.

Last week the rupee fell over the 120 mark which dealers said was driven mainly on speculation as to the fate of the US$ 1.9 billion IMF loan currently being negotiated on. However, with no takers, dealers had to offer their dollars at lower rate which brought down to the 117 range.

"We had to revert to market-forces driven trading," another dealer said.