The Central Bank has issued directives to slash specific lending rates believing the banking sector has had enough time to adjust to low policy rates and that it would compel banks to reduce their interest rate spreads.
Central Bank Governor Ajith Nivard Cabraal said the directive issued to the banking sector to reduce specific lending rates would reduce interest rate spreads and avoid banks taking undue risks when lending picks up as demand for credit grows as the economy improves.
"The banking sector has had enough time to adjust to the low policy rates and we feel the deadline by the end of October could be met," he said.
According to the directive, interest rates on housing loans should be brought down to 14 percent per annum, interest rates on credit card advances brought down to 24 percent per annum while interest rates on other loans and advances have to be adjusted downwards by 1 to 2 percent per annum.
"This would also reduce the big interest rate spreads enjoyed by banks. When spreads are too wide, banks would be inclined to take on more risks when lending, so this could also be controlled and banks could make qualitative decisions," he said.
When policy interest rates were changed recently, the Central Bank brought down the reverse repurchase rate (for overnight commercial bank borrowings from the Central Bank) to 9 percent while the repurchase rate was unchanged at 7.25 percent (the rate for overnight deposits with the Central Bank). Dealers said that this was an indication that the Central Bank wanted interest rate spreads to narrow down further.
Despite rampant speculation that the Central Bank would cut policy rates in September, it did not do so.
"Banks in Sri Lanka depend on deposits, so the Central Bank was clear in its message. It does not want deposits rates to fall too low while there is enough room for spreads to narrow down further," a dealer said.
source - www.island.lk
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