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Three-month Treasury bill rate down to lowest since Nov. 05
Interest rates down, banks liquid but not lending
—Economists, dealers

The rate for three-month Treasury bills reached single digit levels, the lowest since November 2005, at yesterday’s primary auction and the Central Bank says it expects bank lending rates to come down much further.

Three-month Treasury bills were auctioned off yesterday at 9.70 percent.

"With this reduction, primary market yield rates of the Treasury bills have declined by 763 – 795 bps during the year 2009," the Central Bank said last afternoon.

The primary market yield rates of Treasury bonds declined by 956 basis points.

"The decline in yields is witnessed in all maturity classes of Government securities extending up to the 10 year maturity horizon. This reduction in yield rates is in line with the gradual easing of the monetary policy stance by the Central Bank of Sri Lanka and increased foreign investor participation in the Government securities market," the Central Bank said.

"In line with these developments, a reduction in the entire interest rate structure in the economy, including the lending rates of the commercial banks is expected," it said.

However, dealers point out that banks are still cautious when it comes to lending to the private sector, preferring to make a safer investment of their excess liquidity in government securities.

"Foreign exchange inflow are continuing to come in and the Central Bank is intervening in the market to prevent the rupee from appreciating. Three things happen: 1. The Central Bank builds its reserves by purchasing the dollars from the domestic market, 2. The rupee is not allowed to appreciate. This is to the best interest of exporters. If left alone, the exchange rate could be about Rs. 100 to a dollar, 3. When the Central Bank buys dollars, it releases rupees into the market. The entire system has been running at a surplus for quite some time," a dealer said.

Yesterday the market held a surplus position of about Rs. 7 billion.

Interest rates are coming down. Banks have excess rupees. But private sector credit generation is still low.

"We would like to lend more, but you must understand that times are not that easy and many businesses are struggling. Others do not even want to borrow because they are not expanding. We have to consider the risk factor when lending and at this stage, it is better to invest in government securities than to lend," a dealer said.

This problem came up for discussion at the recently concluded annual sessions of the Sri Lanka Economic Association.

"Interest rates have come down and liquidity of banks have also increased but banks are not lending," Dr. Sirimal Abeyratne, Senior Lecturer of Economics of the University of Colombo, said addressing the sessions.

"There are two reasons for this. One, it is a global phenomenon where banks are cautious in their lending. The other reason is that that local banks prefer to invest their excess monies into government Treasury bills. So there is no improvement in credit to the private sector," he said.

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