• Penalties possible for banks that failed to comply with 250 basis point reduction in interest rates by end Dec. deadline 
• Three large banks also in the mix, have to reduce rates by 50 basis points 
• Penalties to be imposed after discussions with Monetary Board 
• Second deadline also looms in March 
• CB official argues penalties necessary as other banks have complied
  
   

The Central Bank has warned that it may slap penalties on seven banks, three of them large ones, as they had failed to reduce interest rates by 250 basis points before the deadline of 31 December, in line with a directive issued by the monetary authority. 

Central Bank Senior Deputy Governor Dr. Nandalal Weerasinghe told reporters on Friday that penalties or “sanctions” will be decided on after discussions with the Monetary Board. 

“Under the directions we issued, the banks were supposed to reduce prime lending rates by 250 basis points by end-December, and the Average Weighted Lending Rates by another 200 points by end-March. So we are coming up on the first deadline and there are some banks that have not complied in terms of basis points. So from next week, we will start imposing certain penalties for the banks that have not complied,” he said. 

The seven banks will need to bring down rates by at least another 50 basis points, Dr. Weerasinghe noted, pointing out that as there was insufficient time, such a reduction was “highly unlikely”. He contended it was unfair to give these banks a pass when others in the industry had complied. 

“Out of this seven, there are three big banks: People’s Bank, Sampath Bank, and DFCC Bank. They will have to bring down (rates) by more than 50 basis points this year. If not, it will trigger certain action that we will have to discuss with the Monetary Board. There are some small banks, such as Indian Overseas Bank, Public Bank and Cargills Bank, which also have to bring down their rates. Overall impact is likely from bigger banks, and those have to comply with the direction that we are giving, both this year and in March,” he 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. 

“Market rates will fall in line with our policy rates. Then after three months or longer, we will observe the situation and make suitable adjustments. It is too soon for us to say what situation we will have to face in six months but we will adjust policy rates accordingly,” Dr. Weerasinghe said. 

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