Financial Times

Relief for borrowers, no respite for depositors
Falling interest rates have brought some degree of relief to borrowers and investors but badly affected depositors, particularly pensioners who are effectively getting a negative return.

Commercial bank officials and economic analysts said the economy was going through a period of adjustment with interest rates coming down after staying high for a long period and that the government has a delicate balancing act in catering to the interests of borrowers and depositors.

Rates are falling not only because the Central Bank has been gradually bringing down its benchmark rates but also because of excess liquidity in the market given the inflows of foreign funds.

Borrowers and depositors still complain that banks continue to maintain high margins but bankers defended their position saying they had reduced rates to good clients and that margins were not excessive given their high costs and provisioning for reserve requirements and bad loans.

"We can really lend only 60 percent of our deposits since the rest is locked up in meeting reserve or liquidity requirements and do not earn interest," said Gaston Gunawardena of the Sri Lanka Bankers' Association.

"Our lending rates are not very high. Except for unsecured overdrafts or temporary overdrafts, no bank charges more than 20 percent for loans," He said that despite the appearance that banks were making excessive profits their profits were less than one percent of assets. Banks were also compelled to tie up funds for bad loan provisioning.

"In many parts of the world defaulters are brought to courts very fast because their legal systems are much faster than ours." P.G. Hemachandra, administrative secretary of the All Ceylon Pensioners' Society, said pensioners who had deposits in state banks had no option since shifting their money to private banks entailed higher risk and because they did not have enough money for other investments with higher returns such as stocks.

"We have been badly affected because interest rates have come down. We can't manage with our pensions," said Hemachandra, a Postal Department employee who retired in 1973. Upali S. Jayasekera, president of the society, said rates have come down partly owing to the stabilisation of the economy.

"So in one way you must be satisfied that the economy is improving as that benefits the whole country. But pensioners find it difficult to cope with the rising cost of living.
However, we're not affected by lower interest rates because very few pensioners have deposits."

Economic analysts said lower interest rates were a combination of both reduced government rates and excess liquidity. "The government is being very cautious in its operations and there has been a general improvement in its cash management," an analyst said.

"Lending rates have indeed fallen but they have been a bit slow in doing so. Banks say they have high costs and provisioning for bad loans and therefore can't reduce rates as much as expected. They also say sometimes they do not want to reduce rates too much to clients who are not credit worthy in order to discourage bad loans."

"We have reduced rates but because of the risk factor we can't quote the same rate to everybody," said a senior Commercial Bank official. "All our prime clients - the risk factor is minimal. But we have an obligation to safeguard depositors' funds.
"When interest rates come down there'll be a different impact on different sectors of the economy. Borrowers will be happy but depositors, including pensioners, will be unhappy. Policy makers have to maintain a balance."

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