CB gets tough on penal rates

Saturday, 27 July 2013 00:19 - - {{hitsCtrl.values.hits}}

Imposes caps of 2% and 3% for banks and non-banks on charges for overdue amounts
Current penal interest rates by banks range 2% to 20% per annum over and above the original interest rates charged on the loan; Finance and leasing firms’ rates are even higher
Penal rates on leasing facilities range 36% to 48% per annum on overdue rentals over and above the original rates

REUTERS: Sri Lanka’s Central Bank has placed a cap on excessively high overdue loan charges demanded by financial institutions to reduce borrowing costs, the island nation’s monetary authority said on Friday, a move analysts suggest to boost credit growth. The Central Bank has asked commercial banks to reduce overdue loan charges on all loans and advances above the original lending rates to a level not exceeding 2% with effect from 1 August, the bank said in a statement. The Central Bank also asked financial institutions to reduce interest on leasing to 3%. The Central Bank said, according to a survey it carried out, financial institutions have been charging between 2% and 20% on loans and 36-48% on leasing. “Such excessive interest rates are not consistent with the present low interest rate regime prevailing in the country,” the bank said in a statement. The Central Bank has reduced the key monetary policy rates by 75 basis points since December and commercial banks’ statutory reserve ratio by 200 basis points last month. Sri Lanka’s repurchase rate and the reverse repurchase rate are at 7% and 9%, respectively. However, commercial banks’ lending rates are still more than 14%, bankers say. “This move is to boost the credit at difficult times,” an analyst from a domestic bank said on condition of anonymity. “Private sector credit growth is not really picking up as expected.” Strong loan growth from loss-making state-run firms has enabled Sri Lanka’s commercial banks to maintain high interest rates despite Central Bank having cut its main policy rates and eased some other tight monetary policy measures.

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