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