Banks asked to reduce lending rates

Despite the end of the war, single digit inflation and single digit benchmark interest rates for government Treasury bills, the private sector is still saddled with high interest rates and banks are still cautious in their lending policies.

According to the Central Bank, doubling per capita income by 2016 to US$ 4,000 would require credit to the private sector to double as well, and almost 15 months after the war, credit growth has been sluggish.

The Bank Supervision Department of the Central Bank issued a directive to all banks requesting them to revise lending rates downwards.

"Since February 2009, the Central Bank has eased its monetary policy stance by reducing the policy rates, viz., the Repurchase rate and the Reverse Repurchase rate by 325 basis points and 300 basis points, respectively. In response, the market interest rates have also adjusted downwards. The banks’ lending rates have also declined with a time lag, but are yet to show full downward adjustment. At the same time, the current macro economic performance and stability warrant a reduction in the risk premia added to lending rates, thus leading to the spread between lending rates and deposit rates of banks reducing further," the bank said yesterday.

"In view of the foregoing, the Central Bank has requested all banks to take appropriate measures to reduce interest rates to at least the following levels by end of October 2010:

* Interest rates on housing loans to 14 per cent per annum.

* Interest rates on credit card advances to 24 per cent per annum.

* Interest rates on other loans and advances to be adjusted downwards by around a further 1-2 per cent per annum."

source - www.island.lk