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Wednesday September 22nd, 2021
Banking

Sri Lanka to start directed lending, ceiling 7-pct rate for wage earner housing loans

ECONOMYNEXT – Sri Lanka will start directed lending under the policy of the current administration and will mandate a ceiling 7 percent rate for housing loans of salaries workers the central bank said.

“The Board also recognised the need to promote economic sectors with higher growth and earning potential, and in this regard, decided to introduce lending targets in the near future for selected sectors in conformity with the policies of the Government,” the central bank said in its November 2020 monetary policy statement.

A 7 percent ceiling housing rate mortgage rate will also be mandated for at least 5 years.

“Furthermore, complementing the concessional loans schemes proposed by the Government in the Budget 2021, the Monetary Board decided to introduce a maximum interest rate on mortgage backed housing loans obtained by salaried employees from licensed banks,”

“Accordingly, licensed banks will be made to charge only 7 per cent per annum for such loans, at least for the first five years of the loan tenure.

The remaining tenure of the loan is to be charged at the monthly Average Weighted Prime Lending Rate (AWPR) plus a margin of up to 1 percentage point. Directions to this effect will be issued to licensed banks shortly.

It is not clear whether housing loan customers will lose fixed rate loans from now on and be exposed to severe interest rate volatility in the future.

Due to central bank liquidity injections made to keep rates down when private credit picks up, Sri Lanka has a history of currency crises, which triggers steep corrective rate spikes.

Under the last administration Sri Lanka began to resort to sweeping central planning of interest rates with then Governor Indrajith Coomaraswamy mandating both lending and deposit price controls.

The central bank kept the policy rate at which new money is injected to the banking system at 5.5 percent and the rate at which excess liquidity is withdrawn at 4.50 percent.

The rate setting monetary board said it was “of the view that the prevailing surplus liquidity conditions provide sufficient space for a further reduction in market lending rates without an adjustment to policy interest rates.”

Tens of billions of rupees has been injected through debt monetization at various tenors of the yield curve keeping excess liquidity around 15 to 20 percent of the monetary base or around 150 to 180 billion rupees for several months.

Some of the liquidity has also come from dollar purchases amid weak overall domestic credit.

But some of the maturing foreign debt has been settled with forex reserve appropriations. (Colombo/Nov26/2020)

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