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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Penal rate-cut to dent banks?

Penal rate-cut to dent banks?

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1Penal rate-cut to dent banks?  Empty Penal rate-cut to dent banks? Mon Aug 05, 2013 12:34 am

bestazhar


Stock Analytic
Stock Analytic
By Azhar Razak

The recent decision by the Central Bank of Sri Lanka (CBSL) to impose a cap on penal interest rates charged on loans and advances by banks, finance and leasing companies is likely to have a detrimental effect on banks, a recent report by an Equity Research firm has suggested. According to a Banking Update published by TKS Securities (Private) Limited the ceiling imposed would impact banks negatively where they need to cut down the current penal interest rates of 5.0%-6.0% (average rate charged by systematically important private commercial banks) to about 2.0%.

“Further, this could sometimes act as an incentive to delay the payments (specifically on overdrafts, leasing, etc) which would increase the overdue loans and advances of banks. We believe this could also act as a barrier to bring down the market interest rates where banks would charge a higher interest rate on their primary lending with the anticipation of compensating for the funding costs on their overdue interest income,” analysts at TKS Securities (Pvt) Ltd, the Investment Bank which specializes in Equity and securities trading opined.

They, however, noted that on the positive side the limit imposed would be a relief to customers who are currently on overdue status to pay up and service the loan.
“I think the lowering of rates could also act as an amnesty for defaulters and encourage them to pay their dues which will mean there will also be money coming into the banking system allowing credit growth to expand which is a step towards a loose monetary policy,” an analyst who did not wish to be quoted said.
The analyst noted that Sri Lankan consumers generally preferred their names not blacklisted by the Credit Information Bureau of Sri Lanka (CRIB) in comparison to regional nation such as Indian consumers.

“For example, the default ratio amongst consumers in India for gold-backed loans recently was higher than that of Sri Lankan consumers,” the analyst added/
Meanwhile, Secretary General of the Sri Lanka Banks’ Association (Guarantee) Ltd Upali De Silva said that it was too early to predict as it will be dependent on each customer’s mentality and how they would perceive the rate-cut. “Although the Central Bank feels that the high penalty rates are an undue burden on overdue borrowers, from a Banks point of view we feel that when the penalty rates are low, people will tend to default more,” De Silva pointed out.

He noted that although tentatively all banks will abide by the Monetary Board’s decision since it is a directive they will watch and see whether they should call for the decision to be reviewed if it had a detrimental effect on the banks. “By the end of this year, maybe we will know how this decision will turn out since right now it is difficult to say how the consumer/borrower would look at it,” he further said.

The Central Bank recently stipulated that with effect from August 1, 2013 penal interest rate cap on loans and Advances (including facilities already granted) would be 2.0% p.a. for Banks and 3.0% p.a. for Finance and Leasing Companies. The banking regulator had said that according to its survey it has been revealed that the current penal interest rates charged by banks are in the range of 2.0%-20.0% p.a. and in respect to Finance and Leasing Companies it’s in the range of 36.0%-48.0% p.a. over and above the original interest rates.

- See more at: http://www.nation.lk/edition/biz-news/item/19780-penal-rate-cut-to-dent-banks?.html#sthash.XIqGdNGV.dpuf

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