•  Monetary Board decides to impose caps on selected credit products
•  Pawning facilities at 18%, pre-arranged temporary overdrafts at 23%, credit cards at 28% per annum and penal interest rate 2%

Central Bank Governor Dr. Nandalal Weerasinghe revealed plans to release a new circular today to bridge gaps in market lending rates whilst boosting policy measures. 

Speaking to journalists at a post-monetary policy review meeting yesterday he emphasised the importance of reducing the interest rate gap by at least 3% within a stipulated timeline.

Dr. Weerasinghe highlighted the significant disparity between policy rates and current market interest rates. 

The Monetary Board has decided to impose imposed caps on interest rates on pawning facilities at 18%, on pre-arranged temporary overdrafts at 23% and on credit cards at 28% per annum, for all licensed banks in the country.

“We noticed that the market interest rates of certain lending products remain excessive and are not in line with the current monetary policy stance. Thus, we decided to adopt targeted measures to reduce the excessive lending interest rates. We hope the new circular would encourage banks to conform to its guidelines,” he added.

Dr. Weerasinghe said the circular’s scope will apply exclusively to banks that have not revised their rates after the policy rate cut announced in July, adding that the expected reduction in interest rates has not materialised as quickly as anticipated. 

He also noted that the forthcoming circular will outline a timeline for banks to implement these measures.

“If banks fail to make the necessary adjustments, the Central Bank will introduce additional directives to ensure that the overall lending interest rate structure remains in line with the monetary policy measures in the period ahead,” he said.

In response to inquiries about the potential impact of the new measures on bank profitability, Dr. Weerasinghe noted that the critical factor for profitability is the net interest margins. 

He pointed out that these margins have grown throughout the Domestic Debt Optimisation (DDO) process, and the concerns surrounding it were mostly resolved, where banks also agreed to share the benefits with customers while ensuring financial stability.

“We believe banks must sustain these margins while also transferring the advantages of lowered deposit and lending rates, along with narrowing the gap between them,” he elaborated. 

Dr. Weerasinghe clarified that maintaining reasonable margins will be instrumental in securing profitability in the future.

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