Central Bank places cap on penal interest rates charged on loans

Sri Lanka’s Central Bank yesterday requested all commercial banks, finance and leasing companies to cut the penal interest rates charged by them on defaulted bank loans.

Accordingly, the Central Bank asked the banks to maintain penal rates of i nterest charged on all loans and advances, including credit facilities already granted, to a level not exceeding 2 per cent per annum, while the finance companies and leasing companies were requested to reduce the penal rate of i nterest to 3 percent per annum, with effect from 1 August 2013.

The Central Bank is of the opinion that the penal interest rates charged by Sri Lankan banks, finance companies and leasing companies at present are excessively high, and that such rates are an undue burden to overdue borrowers whilst also hindering entrepreneurship development in the country.

“The inability of borrowers to service their loans in the light of such high interest rates also has an adverse impact on the financial position of banks, finance companies and leasing companies, as well as financial system stability.”

“In this regard, a Central Bank survey has revealed that the current penal interest rates charged by banks are in the range of 2 percent to 20 percent per annum on the amount in arrears and sometimes on the total amount outstanding, over and above the original interest rates charged on the loan,” the Central Bank said.

As t he monetary authority pointed out, in the case of finance companies and leasing companies, the comparative rates are even higher.