Sri Lanka plans complex price controls on bank loans

ECONOMYNEXT- Sri Lanka’s central bank is planning to impose complex price controls on individual banks, as lending rates are not falling in line with deposit rate caps and credit growth continues to fall below targets.

“Lending rates are not coming down as they should,” Governor Indrajit Coomaraswamy told reporters on Friday.

“We will talk to banks, work out the timelines and how much we expect the interest rates to come down,” he said.

“If they don’t meet those targets we will impose caps on individual banks.”

Coomaraswamy said that lending rate controls are distortionary and that is something which should not be done, but current lending rates are unsustainable for businesses to spur economic growth, creating ‘structural problems’ in a low inflation environment.

He said that the central bank has done much to help reduce lending rates, through liquidity injections, policy rate cuts and price controls on deposits in an attempt to drive down cost of funds for banks.

The average weighted prime lending rate, at which banks lend to their least risky clients such as large corporates, has fallen 160 basis points, but the overall average weighted lending rate has fallen only 25-30 basis points since deposit caps were brought in May.

Coomaraswamy said that it is understandable that lending rates have been sticky downwards, as it takes time for 3-month and 12-month fixed deposits, which form the bulk of bank funding, to be re-priced and reduce costs for banks.

The average weighted new deposit rate calculated by the central bank had fallen to 8.58 percent in July 2019 from 11.24 percent in April.

The average weighted new lending rate has fallen to 13.88 percent by end July from 14.62 percent in May 2019.

However, he said that a 200 basis point fall in lending rates is required.

The price controls were helping boost bank profits by widening margins, during a period when bank profits are falling due to higher bad loans as the banking system is recovering from monetary instability in 2018.

But Deputy Governor Nanadalal Weerasinghe said that was not the intension.

“We are not here to help banks increase their margins,” he said. (Colombo/Aug26/2019)