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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » Sri Lanka banks urged to lower interest rates

Sri Lanka banks urged to lower interest rates

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Sstar

Sstar
Vice President - Equity Analytics
Vice President - Equity Analytics
Sri Lanka's central bank Wednesday urged lenders to reduce interest rates, saying levels of lending needed to rise to fuel economic growth.

The Central Bank of Sri Lanka in its monthly policy review urged commercial banks to reduce the spread between deposit and lending rates and ensure cheaper borrowing. The prime lending rate for some banks is high as 13 percent while the deposit rate is as low as five percent. Almost all banks charge 24 percent on credit card borrowing. Credit to the private sector had reduced by 3.3 percent in April compared to a year earlier, the bank said. Earlier, the bank had expected a turnaround in private sector credit by the second quarter of 2014.

"A reasonable level of expansion in bank credit disbursed to productive sectors of the economy is considered beneficial for the continued growth in economic activity," the bank said in a statement.

It noted that lending rates were too high in the context of the country's official inflation rate dropping to 3.2 percent in May, the lowest level since February 2012.

The Central Bank's benchmark lending rate was reduced by 50 basis points to 8.0 percent in January to encourage private sector credit growth, but it has had no immediate impact, the bank said.

However, the bank felt there was "adequate space" for commercial banks to reduce market lending rates.

"The Monetary Board (of the Central Bank) also decided to urge banks to lower their market lending rates," the Bank said.

It said the economic growth target of 7.8 percent for this year, up from 7.3 percent last year, could be achieved if there was a turnaround in private sector credit in the second half of this year.

The bank's policy review made no mention of the economic impact of religious rioting at two southern coastal resorts where four people were killed and dozens of homes and businesses were torched in two days of violence.

Sri Lanka's economy recorded 8.0 percent-plus growth for two straight years after troops crushed separatist Tamil Tiger rebels in 2009, but the pace has slowed in the last two years.

Copyright AFP (Agence France-Presse), 2014

stevenapple


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
Central Bank is so desperate in encouraging credit. But the general public is seems to be more concern on other factors than the Interest rate to gor for investments.

hettdas

hettdas
Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
@stevenapple wrote:Central Bank is so desperate in encouraging credit. But the general public is seems to be more concern on other factors than the Interest rate to gor for investments.

When interest rates of fixed deposits reasonably down then peoples buying power also propotionaly down. There are considerably high percentage of people live with FD interest.
When peoples buying power reduces the demand for supply reduces. So business people reluctant to increase their production using loans. This is my view...

Roboticfx

Roboticfx
Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
Reduction of interest rate on loans will be a great support on achieving economical goals, as it will expand the investments in new enterprises, infrastructures and other productive fields. The stable look in internal macro economy and external, is optimistic for expansion of aggregate supply.

To realize objectives, it is not enough to reduce interest on savings but interest on loans should be brought down.
When consider the current situation, the public savings flow into banks have decreased significantly, but there is no material change in the supply of investment loans and, number of issued consumption loans have increased. There is a future risk of increasing the inflation rate, as over-demand will be generated in the economy, and also money in banks will go out side than normal as the demand is higher than the supply.

Reduction of FD rates affects much on retired people. The social protection system in Sri Lanka is not much strong like other developing countries and that has made the condition of depending on savings interest.

Quibit


Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
Good to see you Roboticfx, great to have You back in the forum after awhile. I am looking at the next interest rate cut by the CB. If there is no increase in the credit growth, bankers are in for a big suprise from the Central Bank. I look forward for Deposit rate of 5% and Lending rate of 10% from commercial bank within next 12 months,

dhanurrox


Vice President - Equity Analytics
Vice President - Equity Analytics
@Quibit wrote:Good to see you Roboticfx, great to have You back in the forum after awhile. I am looking at the next interest rate cut by the CB. If there is no increase in the credit growth, bankers are in for a big suprise from the Central Bank. I look forward for Deposit rate of 5% and Lending rate of 10% from commercial bank within next 12 months,
It's cut or flat.Increase is not on the horizon.

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