Thursday, 27 June 2013 02:17
Central Bank gets aggressive to ensure faster reduction in lending rates
Statutory Reserve Requirement for commercial banks cut from 8% to 6%
CB links move in line with
Says growth of credit to the private sector should pick up in line with macroeconomic
2 percentage reduction in interest rate could make available Rs. 58 b for disbursements for businesses but commercial banks wary
several emerging peer economies and will reduce interest rate spread in banks
The Central Bank yesterday yet again reinforced its stance that lending rates must reduce further and faster to bolster appetite for private sector credit, thereby boosting economic growth in line with Government projections.
The monetary authority used the less-applied tool, a cut in Statutory Reserve Requirement (SRR), on all rupee deposit liabilities of commercial banks by 2 percentage points to 6% with effect from 1 July 2013. The latest move is hot on the heels of a reduction in policy rates by 50 basis points by the Monetary Board in early May, following a cut by 25 basis points in December last year, in addition to several other measures.
The Central Bank in its statement made yesterday, following the decision made by the Monetary Board on Tuesday, said that since December 2012, in response to the reasonably stable inflation prevailing in the country for a prolonged period of time, the Monetary Board has been gradually easing its monetary policy stance, with two reductions in the policy rates and the removal of the credit ceiling. In keeping with such a policy, an adjustment of general lending rates has taken place, albeit rather slowly.
“At the same time, the Monetary Board has noted with some concern that the spread between deposit and lending rates in Sri Lanka is still considerably higher than those of regional economies,” the CB said.
“While such a situation may signify a comparatively lower efficiency of financial intermediation in Sri Lanka, a further contributory factor was considered to be the comparatively higher SRR of Sri Lanka in relation to other emerging economies,” it said, adding that the cut effective 1 July will bring the SRR in line with several other emerging peer economies.
The Monetary Board was of the view that a reduction of the SRR would enable the banking sector to reduce lending rates further, while also reducing the interest rate spread.
“Along with the downward adjustments to policy interest rates of the Central Bank since December 2012, the current reduction in the SRR and further improvements in banking sector efficiency are expected to reduce market lending rates considerably, enabling the growth of credit to the private sector to pick up, in line with the macroeconomic projections for the year,” the CB said.
Acuity Stockbrokers Research endorsed this view, saying: “The reduction in the SRR is expected to ease market lending rates considerably and is aimed at spurring credit growth within the private sector in order to stimulate the overall macro economy.”
According to Acuity Stockbrokers Research, the SRR is used as a monetary policy tool less frequently than policy rate cuts or open market operations. In the past six and a half years, the SRR has been adjusted just five times. This is in contrast to policy rate changes which have occurred 13 times since 2007.
“The reduction of the SRR implies that adjustments in general lending rates, post policy rate cuts made in December 2012 and May 2013, have been at a slower-than-desired pace,” it said, adding: “Reducing the SRR could also imply that GDP growth is occurring at a slower-than-expected pace.”
Despite recent measures, private sector credit growth has slowed to 10.2% year-on-year in April to Rs. 2.403 trillion, compared to 10.9% a month ago and 34% in April 2012 to Rs. 2.179 trillion.
A lower SRR implies that that proportion of rupee deposit liabilities that commercial banks are required to maintain as a deposit with the Central Bank is less than before. “This in turn implies that the funds available to commercial banks for dispersion will increase. At end-March 2013, commercial banks had Rs. 2,914 billion held in deposits. The 2 percentage point reduction in the SRR now implies that an additional Rs. 58.3 billion is available to commercial banks for disbursement,” Acuity Research said.
A Reuters report quoted the Central Bank’s Economic Research Department as saying that the rate cut will boost market liquidity by releasing extra cash of Rs. 36 billion into the system.
Noting that the greater availability of funds also implies that the cost of borrowing should be lower, Acuity said that following the announcement and at close of trading on Wednesday (26 June), Treasury yields across a number of maturities declined, with the 12-month yield falling as much as 19 basis points to 10.66%.
However, the broking firm warned that the downside of the SRR reduction and the consequent increase in money supply is that inflationary pressures may rise. “Given the already relatively high inflation levels and the excess liquidity in money markets, if the increase in money supply post the SRR reduction is not contained within reasonable limits, there is a possibility of higher inflation going forward,” Acuity Stockbrokers Research added.
Views on whether the latest move will trigger a dip in lending rates were mixed.
“Definitely, the lending rates will come down. There will be more loanable funds. I am unable to say by how many basis points we will be able to reduce the rates,” Reuters quoted Commercial Bank Deputy Chairman K.G.D.D. Dheerasinghe as saying.
However, Reuters quoting unnamed bank officials also said that commercial banks are not in a position to reduce lending rates immediately as expected by the Central Bank because they have already committed to high fixed deposit rates amid strong credit demand from loss-making state enterprises.
“So banks see no reason to reduce rates,” a banker said on condition of anonymity to Reuters.
Since the rate cut in December 2012, T-bill yields have declined by over 200 basis points but rates on commercial loans have declined only by about 100 basis points to around 18%, bankers say.
In May, whilst cutting policy rates, the Central Bank also increased the reserve maintenance period of commercial banks to two weeks from one week from 1 June 2013 in order to offer greater flexibility to commercial banks in managing their liquidity, while maintaining the Statutory Reserve Ratio at the current level of 8%.
“The Monetary Board is of the view that a downward adjustment to the policy rates of the Central Bank is appropriate in order to stimulate domestic economic activity, particularly since inflation and inflationary pressures are at levels that do not pose any immediate risk to the economy,” the Central Bank said in its statement following the May monetary policy review.