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Treasury Secretary disappointed with private banks

Treasury Secretary Dr. P. B. Jayasundera says private commercial banks have not responded enough to the government’s call to lend to the private sector, notwithstanding the low interest rate climate.

He said the Central Bank should be strict when regulating banks and the financial system of the country.

Addressing the National Chamber of Exporters last week, the Treasury Secretary said "unfortunately private commercial banks have not responded enough to low policy rates".

He added: "We agree that taxes on banks are high, but they still make huge profits and build huge reserves. There are structural rigidities in the banking system. There is no research in this regard.

"Banks need to look at how best they can help the country develop, but instead they are motivated by profits. Private commercial banks are structured in such a way that wealth is built around a few and they are building premiums on returns," Dr. Jayasudera said.

"If not for government intervention to bring down lending rates of state-owned banks, interest rates would have still continued to be around 20 percent.

"Bank of Ceylon and People’s Bank have done a wonderful service in taking the initiative to bring down interest rates to what ever level (the government last November subscribed lending rates to specific sector to range between eight and 12 percent), although there is no praise for them in doing so," he said.

Then last Monday, speaking at the launch of Central Bank’s 2009 Annual Report, Dr. Jayasundera said the Central Bank should be strict when regulating banks and other financial institutions.

Inflation was declining throughout 2009, reaching 0.7 percent in September. This allowed the Central Bank to relax its monetary policy stance gradually, bringing down policy rates to where they are today, to a 7.5 percent and 9.25 percent band from 10.25 and 11.75 a year ago.

However, commercial banks were slow to respond and the Central Bank was continuously asking them to bring down rates in line with policy rates.

At the time, commercial banks said their long term deposits were locked in at higher rates and that they could not reduce rates as fast as the Central Bank wanted them to. Added to this, the domestic economy was going through a slump and the banks were cautious in lending to enterprises, except high net worth clients, and preferred instead to invest in government securities.

President Mahinda Rajapaksa invited the heads of banks for a meeting towards end of last year and asked them to reduce their lending rates and lend to the private sector instead of investing in government securities and also cautioned them about speculating on the exchange rate, which at one time depreciated to over Rs. 120 against the dollar.

Last November, the President issued a directive to state-owned banks to reduce their lending rates to eight to 12 percent. The private banks soon followed, and were advertising rate cuts.

Dealers said that they are just beginning to see lending pickup. "2009 was a tough year and we cannot be expected to lend without making sure an enterprise can repay. After all, we are dealing with public funds and we need to be responsible," a dealer said.

Another problem last year was that the government was borrowing from the domestic sector as it became difficult to access international markets due to the global financial crisis and revenues took a hit as domestic industries slumped and imports fell. The private sector was crowded out for credit. Also, the high dependence on domestic sources led to high interest expenditure and put government finances under further stress.

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