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Central Bank believes lending rates should come down despite rate cap removals

11 July 2017 12:03 am - 0     - {{hitsCtrl.values.hits}}

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The Central Bank said the bank interest rates should trend downwards in line with the easing government securities yields as less pressure is expected from government financing towards the second half of the year.


According to Central Bank Governor Dr. Indrajit Coomaraswamy, the closing of the disconnect between the recent behaviour of government securities yields and the bank lending rates is just a matter of time.   


Since the end of April, Sri Lanka’s treasury bill (T-bill) rates have been coming down and the one-year treasury bill rate has come down to 10.45 percent at the last week’s primary bill auction compared to the 11.02 percent peak it reached 
this year.


“The disconnect between the bank credit and treasury bill rates—I suspect it’s only a question of time because you will see that it will reflect in the bank interest rates as well,” said Dr. Coomaraswamy during a recent press briefing in Colombo.


This is certainly welcome news for the households and the corporates, who borrowed heavily until recently, when the interest rates were artificially kept low by the authorities.


As a result, the Sri Lankan households became excessively indebted while the corporates became overleveraged with heavy finance costs weighing on their 
financial performance.


Although the banks rushed to revise down their deposit rates, which have seen coming down during the recent few weeks, they are yet to reduce the lending rates, which rose exponentially during the last 12 months or so. 


However, some analysts argue whether the Central Bank’s decision to remove the lending rate caps on personal credit products was ill-timed.


As a result of this cap removal, from July 1, the lending rates of credit cards, temporary overdrafts and penal interest rates went up by a minimum of 400 basis points.


If the Central Bank wants the bank interest rates to come down, the recent circular issued abandoning the lending caps doesn’t serve the purpose, analysts argue. The Central Bank wants no more that 15 percent growth in private credit for 2017.


According to Fitch Ratings, anything more than 15 percent growth in private credit for over two years put the system into a higher risk category as it could fuel bubbles in certain sectors due to 
excessive credit.


For instance, in April the entire banking sector disbursed on a meagre Rs.19 billion credit to the private sector, which is a significant decline from Rs.82 billion granted in March. 

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