Lending rates too high, deposit incomes too low  – Central Bank

The Central Bank is engaging commercial banks that are charging high rates of interest on loans, much too high compared to the low interest rate environment in the economy, while depositors are being offered much lower rates for their deposits as they continue to maintain their profitability and interest margins at high levels.

Central Bank Director Bank Supervision Ms. Yvette Fernando said the public continued to pay high interest rates on their borrowings.

"We have regular meetings with the heads of commercial banks and we keep requesting them to bring down their lending rates in line with the recent reduction of policy interest rates and we are closely monitoring their progress," Ms. Fernando said.

She said depositors were also receiving low income from their deposits held with commercial banks and called for a fairer adjustment of interest rates.

Policy interest rates are down to 7.5 percent and 9.75 percent for repurchase and reverse repurchase transactions respectively (rates at which commercial banks deposit and borrow from the Central Bank). These rates are down from 9 percent and 11.75 percent a year ago.

Benchmark interest rates on government Treasury bills have also come down to 8.24 percent, 8.97 percent and 9.25 percent respectively (for the three month, six month and twelve month bills) from 12.22 percent, 13.44 percent and 13.78 percent a year ago.

The average prime lending rate of commercial banks is down to 10.57 percent from 18.14 percent last year while average weighted fixed deposit rate is 9.61 percent, down from 16.27 percent a year ago, while the average weighted deposit rate is 7.13 percent, down from 11.52 percent a year ago.

The prime lending rate is offered to high net-worth organisations and individuals and commercial banks dealers said ordinary borrowers, the vast majority of individuals and SMEs, had to borrow at much higher rates of interest.

The low interest rate environment came about after tight monetary policy of the Central Bank brought down inflation to single digit levels last year after peaking at 28.2 percent in June 2008. The Central Bank loosened its tight monetary policy stance in stages in a bid to stimulate the country’s post war economy as credit picks up on lower interest rates.

However, banks did not respond fast enough, preferring to invest their excessive rupee holding in government securities instead to the private sector which saw some hard times in 2008 and 2009. President Mahinda Rajapaksa intervened late last year and ordered state-owned commercial banks to reduce their lending rates to as low as 8 percent on credit to selected sectors.

This decision was taken with the hope that private commercial banks would follow suit and some of them did announce reduction in interest rates.

According to Ms. Fernando, commercial banks have room to reduce their lending rates much further and the Central Bank continuous to persuade them to do so.

Commercial banks seem to be charging the highest possible interest rate on lending, much higher than policy rates or benchmark rates. At the other end, they are offering deposit rates lower than the low policy rates and benchmark rates.

Borrowing rates ought to come down further, while there was space for deposit interest rates to move upwards, this was what Ms. Fernando intimated.

2009 was a difficult year, and according to the Central Bank, the worst year in Sri Lanka’s economic history. But the banking sector continued to maintain its profitability.

"Profitability of the banking industry was maintained in 2009. Compared to the corresponding period since 2006, the sector recorded the highest interest margin during the first quarter of 2010.

Total advances increased by 3.8 percent or Rs. 61 billion to Rs. 1,647 billion in the first quarter of 2010 while non-performing loans increased to 8 percent from a high of 8.9 percent in 2008.

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