CB sets higher rate caps for finance company deposits

The Central Bank has specified the maximum interest rates that the country’s finance companies could offer when attracting customer deposits, effectively raising the earlier cap linked to the treasury bill rate.

In a directive issued on June 30, the Supervision of Non-bank Financial Institutions Department of the Central Bank set out the new deposit interest rate ceiling ranging from 13.55 to 17.05 percent, depending on the tenure of the deposit.

This is the second instance in less than a year the Central Bank raised the maximum interest rates that could be offered by the licensed finance companies (LFCS) to entice customer deposits.

Accordingly, a finance company can offer not more than 13.55 percent for one-year fixed deposit from July 1 onwards—that is 300 basis points above the primary auction’s weighted average yield rate (WAYR) of a one-year treasury bill.

This is an increase from the 13.11 percent offered for a one-year fixed deposit by a finance company at its maximum level.

The Central Bank said the WAYR of a one-year treasury bill for June was 10.55 percent per annum, which could be considered as the base rate for the second half of the year starting from July 1, 2017.

During the last couple of months, Sri Lanka’s treasury bill yields have been easing. At yesterday’s treasury bill auction, the one-year treasury bill rate fell by two basis points to 10.45 percent.

While a majority of the finance companies offer this maximum rate to garner deposits, this is not much higher than what some of the licensed banks offer for a similar tenure deposit.

Hence, it is unlikely that a rational depositor would risk his or her life savings for a few basis points difference in rates for a considerably higher risk by placing their money in a finance company, some of which are facing serious liquidity issues.

Meanwhile, a fixed deposit with a tenure between one to three years could be offered no more than 14.55 percent, which is similar to 400 basis points above the WAYR of one-year treasury bill. Similarly, a fixed deposit maturing in five years or above could be offered a maximum interest rate of 17.05 percent or 650 basis points above the WAYR of one-year treasury bill. According to the directive, the Supervision of Non-bank Financial Institutions Department will publish the WAYR of oneyear treasury bill twice a year – in June and December – which will be applicable for the ensuing six months.