Recently ISIS hit South Asian nation – Sri Lanka that was named to be the best destination to visit in 2019 by Lonely Planet early this year has taken an unprecedented step of ordering price controls on deposits to lower costs and boost margins of banks. Accordingly Sri Lanka’s Central Bank (CBSL) has set interest ceilings for bank deposits for the quarter ending June 30th 2019, on a base rates for short term deposits at 8.0% and longer term rates of 10.54%. However no ceilings have been set on lending rates.
Further the price ceiling for savings and term deposits below three months is 7.50% or 50 basis points below the standing deposit facility rate (repo window) of the Central Bank. The base rate for deposits over 3 months is the simple average of the weighted average yield of 12 month Treasury bills at the last four auctions of the first quarter of 2019. And the base rate for deposits below three months is the 8.00% standing deposit facility rate (repo window) of the Central Bank. Deposits below 12-months are controlled at 10.54% and deposits between 1 and two years are controlled at 11.54% (T-bill plus 100 basis points). Deposits between 2 and 3 years are controlled at 12.04% (T-bill plus 150 basis points) and deposits between 3 and 5 years are controlled at 12.54% (T-bill plus 200 basis points). Meanwhile deposits of 5 years or more 13.04% (T-bill rate + 250 basis points), and reports said that no distinction has been made on the risk rating of individual banks.
“When interim interest is paid, the annual effective rate should be below the price control” The Central Bank said adding that kids with a deposit of 1 year or more, or senior citizens could be 50 basis points higher than the price control.
Reports said that Sri Lanka’s financial market regulator the Central Bank of Sri Lanka has observed high interest rates charged on lending products and excessively high interest rates offered on deposit products by licensed commercial banks and licensed specialized banks (licensed banks) and Non-Bank Financial Institutions (NBFIs) despite the measures taken to bring down overnight interest rates and enhance market liquidity through the reduction of Statutory Reserve Ratio (SRR).
Further in the context of well contained inflation and inflation expectations, Sri Lanka’s interest rates in real terms also have been found to be excessive in comparison to other regional economies. Accordingly, the Central Bank has requested licensed banks and NBFIs to reduce interest rates on deposits to accelerate monetary policy transmission through the financial sector, enabling licensed banks to reduce their interest rates on lending products in general, and to SMEs in particular, and thereby enhance credit flows to the real economy. Interest rates on Savings and other deposits with tenures less than 3 months offered by licensed banks and NBFIs will be linked to the Standing Deposit Facility Rate (SDFR) whilst longer tenures will be linked to the 364 day Treasury bill rate. Debt instruments issued by NBFIs will also be subject to maximum interest rates. In spite of these measures, interest rates on deposits are expected to remain competitive, providing a substantial real return to depositors.
Reports noted that through the above measures, that would reduce excessive cost of funds borne by the financial sector, the Central Bank expects the lending rates to reduce by around 200 basis points to SMEs in the near term.
Further reports also noted that the reduction in SRR by 250 basis points in two steps in November 2018 and March 2019 has already reduced cost of funds and is expected to result in a narrower margin between deposit and lending rates.
Accordingly, Central Bank (CBSL) will closely monitor the behaviour of interest rates of licensed banks and NBFIs on both deposits and loans and take further measures as appropriate in future.
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