CB committee to probe why banks won't reduce interest rates

By Duruthu Edirimuni Chandrasekera

The Central Bank (CB) has appointed a committee to probe why commercial banks haven't reduced their lending rates over the past few months, despite the regulator's numerous measures for them to do so.
While there is no new lending at double-digit interest rates, the CB expected banks to pass benefits to customer through lower interest rates, Prof. W.D. Lakshman, CB Governor told media at the Monetary Policy review of the Central Bank on Thursday. 
In response to a question by the Business Times why the banks haven't reduced interest rates, Prof. Lakshman said that a committee within the CB was appointed to find out what is stopping them from responding adequately to interest rate cuts. "We are daily taking action to address this issue. We are having a dialogue with the institutions to expedite facilities and to revive the economy through lower lending rates," he said.
Despite the private sector credit growing sharply in March, there has been a significant contraction in May. Data showed that it has contracted from 7.6 per cent in April to 6.4 per cent the following month. "The banks are expected to release to the private sector borrowers the enhanced levels of liquidity with the statutory reserve ratio reduction which has effectively reduced the cost of funds for the banks,” Prof. Lakshman added. It was noted that the decline in lending rates were sluggish compared to policy easing by the CB. "Further space remains for market lending rates to reduce."

Prime lending rates are down 160 basis points (bps) so far. It was observed by Senior Deputy Governor Dr. Nandalal Weerasinghe that the small and medium enterprise (SME) lending rates hasn't come down and the credit given to those sectors by the banks are low. "The reluctance to drop interest rates in this sector is because the cost of funds for them is high," he explained. He noted that the banks have to wait at least a year to rationalise the cost of funds in order to lend to this sector.
He said this is one of the main reasons that the 4 per cent refinancing facility was introduced to the SME sector by the CB.