Sri Lanka to force down bank lending rates
Apr 09, 2019 05:41 AM GMT+0530 | 3 Comment(s)
WIDE SPREAD Retail lending rates at banks have not fallen in line with benchmark rates such as bills and call money/reverse repo rates..
ECONOMYNEXT- Sri Lanka's central bank is in a battle to grow private credit, and will target high lending rates at banks, Governor Indrajit Coomaraswamy said, after the monetary board decided to hold rates steady in April.
"We have witnessed a private credit slowdown," he told reporters on Monday.
"There could be an adverse credit cycle if it is not given proper attention."
Sri Lanka's private credit fell by 4.3 billion rupees in January and grew by 7.6 billion rupees in February.
Coomaraswamy said if the 13.5 percent annual private credit growth target for 2019 is to be achieved, credit growth has to average 75 billion rupees per month for the rest of the year.
However, retail lending rates at banks have not fallen in line with benchmark rates such as bills and call money/reverse repo rates, he said.
"All the benchmark interest rates have come down significantly this year, but deposit and lending rates are still going up," he said.
"So there's a disjuncture there."
The central bank had left policy rates unchanged in April for the next one and a half months, despite the lack of credit growth, while suggesting that there is a strong case for a rate cut in the future.
"To support private sector credit growth, one way is to reduce rates, other is to attack the margin between the benchmark and lending rates," Coomaraswamy said.
There is a 200 basis point margin between benchmark rates and retail lending rates, which is 'far too large', the governor said.
"First we will attack the margin, and then look at the policy rates," Coomaraswamy said.
He said the Prime Minister, along with central bank officials, chartered accountants and bankers had held a meeting on how to address the gap between the rates and grow private credit.
A working group was set up at the meeting to generate specific actions to reduce the margin, and the report will be handed over on Thursday, Coomaraswamy said.
He said Sri Lanka needs higher credit growth to reach an economic growth of 4 percent in 2019.
Sri Lanka's credit growth was 15 percent in 2018, or a total of 762 billion rupees, while economic growth was 3.2 percent. (Colombo/Apr08/2019)