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Monday, April 25, 2011

SSR increase: Commercial banks to lose Rs.1.4 billion revenue

By Jithendra Antonio

Sri Lanka’s Licensed Commercial Banks (LCBs) may lose Rs.1.4 billion worth revenue due to Central Bank’s recent increase of the Statutory Reserve Ratio (SRR) by 1 percent, a recent report on the country’s monetary policy by CT Smith Stockbrokers outlined.

Accordingly, the CT Smith Stockbrokers said, based on deposit balances of local Licensed Commercial Banks as at 31 December 2010, which consists of over 90% of the banking sector assets, the additional 1% of deposits is estimated to be Rs.19.2 billion.

“As the fund maintained with the Central Bank does not generate a return, the incremental loss in revenue to these local LCBs is estimated to be Rs.1.4 billion.” CT Smith Stockbrokers highlighted in its report.

The CT Smith analysts said they have used Sri Lanka’s estimated 1 year T-Bill rate for 2011 Earnings of 7.53% for this calculation.

However, the stock broking firm pointed out that with banking sector risk weighted assets expected to increase during 2011 E, (earnings owing to the low interest rate scenario), any negative impact due to the increase of SRR is expected to be negated.

In its Monetary Policy Review for April 2011, the Monetary Board of the Central Bank of Sri Lanka (CBSL), tightened its monetary policy, in a bid to control inflation, by increasing the Statutory Reserve Ratio (SRR) by 100 basis points (bps) to 8%, from the reserve week commencing 29 April 2011. The SRR is the percentage of local currency deposits that the Licensed Commercial Banks (LCBs) have to maintain with the Central Bank of Sri Lanka.

Report further forecasted that whilst the amendment to policy rates would increase the overall cash position of the Central Bank and allow it to increase its lending capacity; Central Bank has however, by increasing the SRR from 7% to 8%, has reduced the liquidity of LCBs, which increased significantly in October 2010, partly due to the two rate cuts in mid-2010.

“Subsequent to the SRR revision, the excess liquidity in the market is expected to decline gradually.” The report noted adding that since LCBs have to increase the reserve maintained at the Central Bank, they will have to identify an alternate funding source to the extent of that additional 1%. According to the Central Bank, the Monetary Policy was tightened to pull back any buildup of demand-side pressure on inflation and ensure continued monetary stability.

The tightening of Monetary Policy follows the increase of point-to-point inflation as measured by the Colombo Consumer Price Index (CCPI - base year of 2002) to a 26 month high of 8.6% an increase in annual average inflation to 6.2% in March 2011.

source - www.dailymirror.lk