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CB cuts bank reserve ratio to encourage lending

27 June 2013 09:53 am - 0     - {{hitsCtrl.values.hits}}

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The Central Bank of Sri Lanka (CBSL) will be reducing the Statutory Reserve Requirement (SRR) on all rupee deposit liabilities of commercial banks by 2 percent to 6 percent with effect from July 1, 2013, in a bid to induce banks to cut lending rates.

“The immediate result of this decision is that it would reduce bank lending rates since there would be more money for lending,” a banking sector analyst said.

He also pointed out that it was a sound decision taken by the Central Bank as it would increase money supply to the economy and would add approximately Rs.40 billion into the banking system.The Central Bank noted that this would bring the SRR in line with several other emerging peer economies.It is considered that the spread between deposit and lending rates in Sri Lanka is still considerably higher than those of regional economies.

The Central Bank slashed policy rates in two instances during the last seven months to spur economic growth and urged commercial banks to cut lending rates accordingly. However, the banking sector has so far responded slowly to this easing of the monetary policy.The SRR is a Central Bank regulation that sets out the minimum fraction of customer deposits that each commercial bank should hold as reserves. This required reserve is currently 8 percent.The reserve requirement can be used as an instrument of the monetary policy because the higher the reserve requirement is set, the less funds banks will have to loan out, leading to lower money creation.
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