CB continues to push for fund redistribution to rural regions

Sri Lanka’s new Central Bank Governor may continue to push the country’s financial sector, mainly banks, to redistribute funding to rural regions, an initiative started by his predecessor.

“I would like to request that and see what they do. Instinctively I prefer not to have directed credit. But, we’re trying to create better macro fundamentals,” Dr. Indrajit Coomaraswamy told Mirror Business on the sidelines of the 9th Doing Business Forum organized by the Finance Ministry.

He added that it is imperative that economic development is spread throughout the country.+

He noted that there had been some positive responses from some financial institutions during past discussions in this regard.

The former Governor Arjuna Mahendran early part of this year revealed that the Central Bank was studying the Community Reinvestment Act of the United States to implement a similar legislation in Sri Lanka, since local financial institutions are taking deposits from rural areas and lending to entities in metropolitan areas.

Further, many financial institutions do not invest significantly to set up a presence in rural areas, and therefore, people in those areas are forced to take loans with higher than usual interest rates to reflect the risks of lending in such areas. “We’re trying to create a better investment climate. Once that gets into place, banks hopefully will recalibrate their risk appetite and they will be willing to lend more to the marginalized areas they mobilize deposits from,” Dr. Coomaraswamy said. However, he said that the Central Bank will monitor if the financial institutions will transition to inclusive lending policies following the requests made in the future. “Clearly we will monitor and see what is actually happening,” he said.
The Community Reinvestment Act had been a direct catalyst for the 2008 financial crisis, according to many experts, as US banks had lent to rural regions, specially for mortgages, without conducting proper risk assessment, evaluating lending criteria or proper documentation.

These bad mortgages, when collected and placed in mortgage bonds, had been rated AAA by credit rating agencies. However, as default rates rose the mortgage bubble burst, and banks faced liquidity crises and bailouts from the government, triggering the global financial crisis. (CW)