Interest margins under pressure in banks

A high interest rate scenario will hinder interest margins of banks in the future as the demand for lending falls, which in turn will deter deposit growth and increase non performing advances (NPAs), according to industry stakeholders.

They said that the Central Bank is also pressurising the commercial banks to increase the deposit rates, which will lead to lower interest spread on lending.

The regulator has said that the credit expansion of the private sector is running at unhealthy figures at approximately 25 percent. “They say the reason for high inflation is high credit growth in the private sector and want this growth to be ideally at 17 percent. This is the reason they want commercial banks to push their interest rates,” Anil Amarasuriya, CEO, Sampath Bank told The Sunday Times FT. He pointed out that when the treasury bills increase, the commercial banks have to increase their deposits rates, resulting in a hike in their lending rates.

“Due to liquidity in the market becoming scarce, the deposit growth becomes that much more concentrated and the cost of borrowing both new and existing becomes that much higher. Therefore the borrowers may not be able to meet their demands,” Amarasuriya explained further.

Mahendra Amarasuriya, Chairman, Commercial Bank, noted that the current interest rate scenario is unhealthy for any economy. “The present situation will slowdown the economy because both investments and borrowings will decrease,” he warned.

Ranjith Samaranayake, Senior Deputy General Manager, Finance and Planning at Commercial Bank pointed out that high interest rates will affect the repayment capacity of the borrowers because the Commercial Bank will increase their servicing cost. “There will be an increase in the non performing advances (NPAs),” he said, adding “we expect a deterioration on the asset quality of commercial banks as the hikes in interest rates will erode the re-payment ability of borrowers.” However according to stock market analysts, certain banks, such as Sampath Bank, DFCC and NDB Bank, which have excellent asset quality levels are expected to perform well.