Central Bank cap on lending if banks and NBFIs don’t cooperate
The Central Bank will be compelled to impose a cap on lending if the banks and financial institutions fail to reduce high lending rates, Central Bank Governor Indrajit Coomaraswamy warned.
This action will be taken to accelerate monetary policy transmission through the financial sector, he said adding that a lending cap will be imposed individually if the banks and non bank financial institutions continue to levy high interest rates.
Dr. Coomaraswamy told a media conference in Colombo on Friday that lending cap enables licensed banks and non bank financial institutions (NBFI) to reduce their interest rates on lending products in general and to SMEs in particular.
The main aim is to enhance credit flows to the real economy; he said adding that when inflation has been brought down to single digit of 3 to 4 per cent business entities cannot afford to pay high interest rates of over 20 per cent.
The Central Bank has already issued a directive to banks and NBFIs to reduce interest rates on deposits.
The aim was to bring down lending rates by about 200 basis points but so far the rates have come down only by 31 basis points, he said.
Debt instruments issued by non-banking financial institutions will also be subject to maximum interest rates.
The Central Bank has also injected substantial rupee liquidity to the domestic market by reducing the Statutory Reserve Ratio (SRR).
Meanwhile the Monetary Board of the Central Bank at its meeting held on Thursday decided to further reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 50 basis points to 7 per cent and 8 per cent, respectively.
This will be reducing the cost of funds of banks and NBFIs and borrowers, particularly SMEs, can expect to obtain credit facilities at reduced interest rates from those institutions, Dr Coomaraswamy said.
Debt instruments issued by non-banking financial institutions will also be subject to maximum interest rates.
The Central Bank has also injected substantial rupee liquidity to the domestic market by reducing the Statutory Reserve Ratio (SRR).
The Central Bank will closely monitor the behaviour of bank interest rates and take further measures as appropriate in future to support economic growth given well contained inflationary pressures.
Referring to the current status of the proposed new Monetary Law Act, Dr. Coomaraswamy said that the draft bill is now under consideration of the Parliamentary Public Finance Committee and it will come up before the cabinet soon.
He added that proposed amendments are essential to halt governments making the Central Bank print money, which undermines macroeconomic fundamentals which are a must for strong economic growth.
Sri Lanka will be able to raise US$500 million in Samurai bonds by October after getting the approval of the cabinet of ministers next week to appoint lead managers to sell a yen denominated bond in Japan, he disclosed.
The Japan Bank for International Co-operation (JBIC) has offered a 95 per cent credit guarantee. He said several Japanese institutions were supportive of the bond with a JBIC guarantee and negotiations towards this end are underway.