CB to take action against eight banks

• People’s Bank, Commercial, MCB, Indian Overseas and Standard Chartered among them
• Penalties to be discussed with Monetary Board first 
• Sharp reductions seen from some banks ahead of 27 Dec. deadline 
• AWPR falls to single digits for first time since April 2016 
• Market lending rates expected to continue decrease with regular re-pricing   

The Central Bank yesterday said it would take action against eight banks for missing rate targets set by the monetary authority earlier this year, but pointed out average weighted prime rates had declined from 12.24% to 9.94% – the lowest level since April 2016. 

The eight banks that have failed to comply with the Central Bank’s directive are People’s Bank, Commercial Bank of Ceylon PLC, Indian Overseas Bank, MCB Bank Ltd., Public Bank Berhad, Standard Chartered Bank, Amana Bank PLC and Axis Bank Ltd.

“The Central Bank intends to take appropriate measures in relation to these banks, as well as those licensed banks that have not met with the other provisions of the Order, to ensure that the general public continues to benefit from an efficient transmission of recent policy decisions through the financial system,” the monetary authority said in a statement. Any penalties will first be discussed with the Monetary Board. 

According to the data released by the Central Bank, the State-run People’s Bank has failed to meet the price ceiling by 16 basis points, Commercial Bank of Ceylon by 29 basis points and Amana Bank by 84 basis points. Standard Chartered Bank had a shortfall of 29 basis points, Axis Bank by 84 basis points, Indian Overseas Bank by 96 basis points and Public Bank Berhad by 163 basis points.

The Monetary Law Act Order No. 02 of 2019 on ‘Enhancing Efficiency of the Transmission of Recent Policy Decisions to Rupee Denominated Market Lending Rates’ required, inter alia, every Licensed Commercial Bank (LCB) to reduce their weekly Average Weighted Prime Lending Rate (AWPR) by at least 250 basis points by 27 December 2019, compared to their AWPR published by the Central Bank of Sri Lanka as at 26 April 2019 in the Weekly Economic Indicators publication. 

This directive did not apply to Licensed Commercial Banks (LCBs), whose AWPR reaches or falls below 9.50% per annum as at the date of this Order or anytime thereafter.

The Central Bank observed that several LCBs have complied with the above Order, and in particular, some LCBs have reduced their Average Weighted Prime Rate (AWPR) sharply during the week ending 27 December 2019 from the previous week ending 20 December 2019 to meet this regulatory requirement. 

“Accordingly, the overall weekly AWPR has declined by 230 basis points from 12.24% as at 26 April 2019 to 9.94% as at 27 December 2019. This is the first time since 29 April 2016 that AWPR has declined to single digit levels.

“As per the Order, any LCB shall not increase its AWPR, from the reduced level, and it is expected that market lending rates, particularly those linked to AWPR will continue to decline in the period ahead, with regular re-pricing,” the statement added.  

The Central Bank issued the interest rate reduction in September, which contained a multi-step process with deadlines falling in October, November, and on 27 December. The reduction in the Statutory Reserve Ratio (SRR) by 2.50 percentage points in two steps was expected to enable licenced commercial banks (LCBs) to invest additional funds amounting to around Rs. 150 billion in revenue generating activities. 

The reduction in SRR announced earlier in the year was also aimed at improving rupee liquidity in the domestic money market, while a further reduction in money market interest rates was effected by reducing policy interest rates by 100 basis points in two steps in May and August. The Central Bank has said that it will evaluate the situation in March 2020 before issuing further directives.