In what appears to be a desperate and last-ditch attempt to stimulate a hobbling economy, the lawmakers and Central Bank are coming up with a highly interventionist-styled policy package recommended by a prime minister-appointed working committee to nudge the banks to cut rates and lend more to small businesses.
In a second close door meeting held at the Prime Minister’s Office yesterday for the bank chieftains along with the participation of Development Strategies and International Trade Minister Malik Samarawickrama, the working group appointed to look into the higher market interest rates has chastised the participants for the high rates that they charge from their borrowers and warned of imposing a cap on their deposit rates to force down the lending rates.
Following the meeting, Prime Minister Ranil Wickremesinghe announced to the media that the Monetary Board of the Central Bank would issue orders next week to bring down the real interest rates by 200 basis points, in an attempt to bring down the interest cost for business development, while maintaining economic stability.
He noted that there would be special relief for SMEs.
“We will impose a deposit rate interest cap on banks and revise the basis of determining the existing caps on finance companies,” he said.
One chief executive officer who participated in the meeting said that there was some desperation in the faces of all those who hosted the meeting and they wanted to bring down the rates as soon as possible and accelerate lending to risky segments.
He described what he heard at the meeting as outrageous as they had never come under such political pressure before and said what they were hearing was also unbelievable in a system which has been operating with minimal political interference in its day-to-day operations.
Another one said it was simply hilarious in one way that they try to preach the bankers how to run banks.
Yesterday, the prime minister-appointed working group also recommended the banks to loan up to Rs.50 million to the small businesses without going through the financial soundness of the borrower.
These facilities are called as clean facilities and the lenders run very high risk in the case of defaults because such facilities are not backed by any collateral, except for the cash flows of the business.
The committee led by Nihal Fonseka, a veteran banker appointed to the Monetary Board, has also recommended that loans to the SMEs could be given at 2 percent less interest than the current average SME rate.
To facilitate such lending to the small businesses at less rate, the Central Bank plans to impose a cap on the deposit rates offered by the banks, the first time in history that such a ceiling on bank deposit rates is to be imposed.
The cap will most likely to be decided based on the one-year treasury bill rate.
There is a deposit rate cap already in place for licensed finance companies, which is revisited biannually.
Yesterday’s was the second back-to-back closed door meeting held with the bank chieftains in less than a week, to explore the possibilities of how the banks could be used to accomplish political gains.
Earlier this week, the Monetary Board left the key policy rates unchanged at its second meeting for the year, giving a forward guidance of a dovish monetary policy at a future meeting with the Monetary Board, depending on the behaviour of the inflation and global and other domestic economic factors.
Meanwhile, questions are also raised from several quarters of the true independence of the Central Bank as they appear to be succumbing to the political pressure to cut rates, which may or may not be desirable at this juncture.
The analysts asked how a Monetary Board member could advocate what is best for the banks and the economy without bias while being seated with the political leadership of the country.
“This is simply unacceptable and goes contrary to the accepted norms of the Monetary Board independence,” said one analyst.
The ruling coalition, the United National Front, is facing some crucial elections towards the end of this year with their stakes remaining too high.
According to the prime minister, the third meeting with the CEOs of the banking sector is scheduled to be held in six weeks and further measures are to be explored if the current measures don’t bear the expected results.