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Friday September 30th, 2022

Sri Lanka banks warned of price controls on lending

ECONOMYNEXT – Sri Lanka will slap price controls on bank loans if rates do not come down fast enough Central Bank Governor Indrajit Coomaraswamy said, after placing deposit rate ceilings in a controversial move and a rate cut.

"In the coming weeks we expect the bank to bring down lending rates significantly," Governor Coomaraswamy said.

"There is no reason for lending rates cannot come down and come down significantly. If they don’t come down, then the Monetary Board would need to consider whether lending rates should be capped as well.

In a controversial move Sri Lanka’s central bank slapped controls on deposit rates after busting the currency and destroying real value of small savers in particular.

It is not clear whether bankers were involved in the decision to put price controls on deposit rates. If they did, it may border on regulatory capture, or collusive behavior or both in a bid to fleece depositors by killing competition, critics say. In any case, no banker objected.

Classical economists were saddened by the move.

"Poor depositors," tweeted, top economist W A Wijewardene, soon after price controls were slapped on deposits.


If bankers did collude in the deposit price controls, they will be simply reaping the whirlwind, analysts say, if and when price controls are brought on lending rates, but it is policy regression in terms of the country to place greater reliance on price controls and less on markets.

Deposit rates have come down about 200 basis points but the prime lending rates have come down by only 31 basis in the same period.

Governor Coomaraswamy said lending rates were not coming down fast enough, even though authorities recognized that it took time for costs to fall, as earlier deposits may have been taken at higher rates.

Higher interest rates are the only way savers can recover some of the real value of deposits the central bank destroyed when it printed money and depreciated the currency from 153 to 176 to the US dollar in 2018.

The rupee fell due to monetary instability coming from rate cuts imposed with massive bouts of money printing through term reverse repo injections.

After credit fell, overnight rates were also kept up by the central bank through its term repo operations. 

One good outcome of the last currency bust was that the statutory reserve ratio, a key reason for the big gap between leding and deposit rates, were somewhat reduced. (Colombo/May31/2019 – Update II)

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