CBSL Chief directs banks to lower interest rates immediately

Central Bank Governor Dr. Nandalal Weerasinghe 

The Central Bank Governor Dr. Nandalal Weerasinghe last week wrote to the commercial banks to reduce interest rates immediately as it was warranted.

In a letter to the Sri Lanka Banks Association, the CBSL Chief said it recently reduced the policy interest rates by 450 bps on two occasions with a view to enabling the economy to reach its potential while stabilising inflation at mid-Single digit levels in the medium term and easing pressures in the financial markets. Accordingly, it is expected that the market interest rates, particularly lending rates, will adjust downwards adequately and swiftly, and the banking and financial sector will pass on this benefit to individuals and businesses, thereby supporting to rebound the economic activities of the country and enabling borrowers to repay credit facilities which in turn enhance the asset quality of the banking sector. 

“We observe that the deposit interest rates of the banking sector have significantly been reduced while the lending rates continue to be downward rigid. Such rigidity of lending rates would be counterproductive in the process of envisaged economic recovery, and the faster normalisation of interest rate structure would not only benefit the businesses and individuals, but also the banking sector as well through the expected improvement in the quality of credit,” CBSL Governor pointed out. 

In this regard, he drew banks attention to the discussions at the meeting held on 29 June 2023, with the Committee on Public Finance on Domestic Debt Restructuring (DDR), where the representatives of the banking sector were of the view that the lending rates could be brought down if the impact of DDR to the banking sector is minimal compared to the other affected institutions. Further, the necessity of initiating measures to reduce the interest rates charged on certain credit facilities which are excessively high, in the wake of market interest rates decreasing, was brought to the attention of all Chief Executive Officers (CEOs) at the monthly CEOs meeting held recently at CBSL, chaired by the Governor.

Further, CBSL Chief pointed out the credit risk of the banking sector is increasing where stage 3 loans to total loans currently stand at around 13.3% and the profitability of the sector has been hampered due to soaring impairment charges. The liquidity position of certain banks needs to be strengthened amidst the current macroeconomic conditions.

“Accordingly, a concerted effort to reduce lending rates will enable individuals and businesses to re-commence/ continue the repayment of credit facilities and improve sustainability of borrowers which will lead to a positive impact on the real sector resulting in the banking sector performance to improve. The CBSL strongly expects this will contribute to enhancing the resilience of banks thereby enabling expansion of banking business in the period ahead,” the Central Bank Governor said.

CBSL....

“In view of the above, we urge the licensed banks to take immediate measures to adequately reduce the lending rates applicable to all lending products. We wish to reiterate that inadequate and delayed downward adjustment of lending rates by the banking and financial sector may compel administrative measures by the CBSL in the period ahead,” Dr. Weerasinghe emphasised.