A senior official of a state bank says finance and leasing companies would not be in a position to reduce lending rates immediately as deposits are contracted at higher long term rates.

"Finance and leasing companies certainly can reduce their lending rates but it would take a few more months for them to adjust according to Central Bank’s expectations. It would not be an immediate downward revision but a gradual one," the official told the Island Financial Review, not wanting to be named.

In a statement issued Thursday evening the Central Bank said there was space for finance and leasing companies to reduce lending rates.

"There is now sufficient space for registered finance companies and specialised leasing companies to reduce their lending rates, and accordingly the Central Bank expects those financial institutions to make a commensurate downward adjustment in lending rates, over the coming weeks," the regulator of the country’s financial system said.

"Such a reduction would benefit entrepreneurs in industry, services and agriculture sectors, in particular small and medium scale businesses. At the same time, the leasing, hire purchase and other lending volumes of registered finance companies and specialized leasing companies would increase as a result, thereby contributing to improve economic activities in the country," the Central Bank said.

The Central Bank said deposit rates and borrowing rates of registered non-bank financial institutions have reduced and "are expected to reduce even further, resulting in a substantial reduction in their costs of funds".

After the Rs. 25 billion Golden Key scandal broke out last year the country’s finance and leasing companies came under stress as public confidence deteriorated.

The Central Bank had to intervene and appoint managing agents, such as the Merchant Bank of Sri Lanka, to several of these institutions in a bid to bring back stability after experiencing a run on their deposits.