Sri Lanka Central Bank may take more measures to get lending rates down

Central Bank of Sri Lanka

(Reuters) – Sri Lanka’s central bank could take more steps to reduce high lending rates if commercial banks do not fall in line with monetary policy rate cuts, a top central bank official said on Thursday.

Nandalal Weerasinghe, deputy central bank governor, said lending rates remain too high despite trims of 75 basis points in policy rates since December. The high rates are crimping the island nation’s growth, he said.

His comments come two days after the central bank told commercial banks to cut the rate charged on credit card advances by 4 percentage points in a bid to get other lending rates down.

“We don’t see a justification for very high interest rate margin for the banks. They are making huge profits and the interest margins are high,” Weerasinghe told Reuters.

“If the rates are not coming down, we have instruments. We can impose regulations if we want,” he said, without elaborating on what the central bank might do.

In 2009, President Mahinda Rajapaksa in his capacity as the finance minister ordered state banks to slash lending rates by almost half, after repeated cuts by the central bank failed to reduce commercial lending rates.

Sri Lanka is expected to release first quarter economic growth on Monday. Growth, which hit a record 8.2 percent in 2011, cooled last year to 6.4 percent.

Central Bank Governor Ajith Nivard Cabraal last week said first quarter growth will be slightly lower than a year earlier, but this year’s 7.5 percent target should be achievable.

The central bank kept key policy rates steady last Friday after slashing them 50 bps in May. The repurchase rate and the reverse repurchase rate are at one-year lows of 7.00 percent and 9.00 percent respectively.

Since the central bank slashed the policy rates on Dec. 12, treasury bill yields have declined more than 200 bps. But rates on commercial loans have declined only by about 100 bps and remain around 18 percent, bankers say.

“That’s why we are asking the banks to reduce the (lending) interest rates because they are not following our monetary policy path,” Weerasinghe said. (Reuters)