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Sri Lanka’s central bank to punish eight banks for flouting price controls

ECONOMYNEXT – Sri Lanka’s central bank said it will punish eight banks for not meeting price ceiling set for loans, invoking sweeping powers given to the agency by its US architect 70 years ago.

People’s Bank, Commercial Bank of Ceylon PLC, Indian Overseas Bank, MCB Bank Ltd, Public Bank Berhad, Standard Chartered Bank, Amana Bank PLC and Axis Bank Ltd have failed to follow the price controls.

“The CBSL intends to take appropriate measures in relation to these banks, as well as those licensed banks that have not met with the other provisions of the Order, to ensure that the general public continues to benefit from an efficient transmission of recent policy decisions through the financial system,” the monetary authority said.

The central bank injected liquidity in 2018, to generate yet another balance of payments crisis, just as the economy recovered from a previous crisis and was forced to hike rates to prevent a complete meltdown of the currency, analysts have said.

Countries that depreciate currencies due to so-called dual anchor conflicts – targeting an exchange rate to collect reserves while also printing money to control rates – tend to have high nominal interest rates.

Bad loans that come after the currency collapse also make it less easy for banks to quickly lower rates. Countries that have monetary stability either a genuine floating rate or consistent peg tend to have lower interest rates.

Analysts have called for reform of the central bank to eliminate dual anchor conflicts to either have a consistent peg like Dubai, Bahrain, Oman, China till 2005, Hong Kong, Singapore so that people can go about living in peace.

State-run People’s Bank has failed to meet the price ceiling by 16 basis points, Commercial Bank of Ceylon by 29 bp and Amana Bank by 84 basis points.

Foreign Standard Chartered Bank had exceeded the ceiling rate 29bp, Axis Bank by 84 bp, Indian Overseas Bank by 96bp and Public Bank Berhad by 163 bp.

The price controls will stay in effect till March 2020. The central bank also slapped deposit controls on savers who had already been hit by currency depreciation, but they have been removed.

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The outright use of coercive power on rates had not been used even in the 1970s.

“This is the first time, in its whole history, that the Central Bank has used its powers to order commercial banks to cut lending rates,” economist and former deputy governor W A Wijewardene wrote in his column in Sri Lanka’s Daily FT newspaper.

“In the past, the Bank had got commercial banks to cut interest rates not by ordering them, but by using other tactics.”

(Colombo/Dec30/2019)

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