Business Times

Interest rates hike for senior citizens welcomed

The Central Bank’s (CB) revision on interest rates paid by registered finance companies this week is being viewed as a positive development by finance companies, particularly the special rate of interest to the deposits of senior citizens. Immediate Past Chairman of the Finance Houses’ Association Shirley Perera said finance companies usually revise their interest rates every three months. The rates were revised as of 1 January 2010 which allows them to give their depositors 3% to 4% over the weighted average interest rate. The average rate is now 14% as opposed to last years maximum interest rate for one year which was 16.5%.

A CB statement said the move was a result of the Monetary Board considering the declining trend in market interest rates and the need for addressing the liquidity constraints of finance companies. Mr. Perera said finance companies received the circular last week and have advised their depositors of the changes.

The CB stated that it has considered the need for enabling finance companies to pay a special rate of interest to the deposits made by senior citizens as a means of retaining such funds for long term financing purposes. The CB said this would relieve the impact of declining interest rates on the earnings of senior citizens who have deposited their pension benefits and other long term savings with finance companies as a means of earning.

Mr. Perera said senior citizens who are entirely dependent on their interest income will be affected. Banks were offering interest as high as 18% which dropped to 12% and has since declined even further to an average of 7%. Some banks are offering 8%. Due to the drastic reduction in interest rates, the monthly income of senior citizens has also come down.

“This is the reason they are coming back to finance companies,” Mr. Perera said. “During the difficult period for finance companies last year, Rs.20 billion was shifted from non-banks to banks because confidence in the industry was eroding. Now these people are coming back and finance companies are regaining stability.”

Even with a small calculated risk from finance companies, Mr. Perera explained that depositors are willing to come back. The situation for the industry is improving. “Medium sized companies are also getting a fair amount of deposits now because depositors are coming back from the banking stream.”
Secretary General of the Bankers’ Association Upali De Silva told the Business Times that this will be a temporary measure like bonus interest on Non Resident Foreign Currency (NRFC) accounts. “If interest rates go up, then it makes sense that this will be withdrawn,” he said.

Mr. De Silva said the additional interest on deposits for senior citizens is an issue that has been raised by banks before. “It is to tide over the problems that senior citizens have at the moment. We have brought up the issue of special benefits for senior citizens to the CB before. They don’t have benefits like in other countries.”

According to the revised direction issued by the Monetary Board with effect from 1 January 2010, finance companies may pay an additional 4% over the weighted average yield on 364 -day Treasury Bills issued during the immediately preceding quarter, in respect of short term deposits having maturity of 12 months or less. For deposits over 12 months, finance companies may pay an additional 5% over the weighted average yield on 364 -day Treasury Bills issued during the immediately preceding quarter. In respect of savings deposits, finance companies may pay interest not exceeding the weighted average yield on 91-day Treasury Bills.

In the case where a time deposit or a savings deposit maintained by a person who is over the age of 60 at the time of making or renewing such deposit after 1 January 2010, a finance company may pay an additional interest of one percentage point over the above-mentioned limits.

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