Banks warned of lend­ing rate caps

Daily Mirror (Sri Lanka) - - LATE CITY -

„CB warns banks with caps if they fail to bring lend­ing rates down fast „Sends let­ter to all banks ask­ing them to cut rates fol­low­ing mon­e­tary eas­ing „Re­quests in­for­ma­tion on ex­ist­ing lend­ing rates and loan repric­ing cy­cles

„Is­sues direc­tive re­lax­ing LTV on elec­tric ve­hi­cles to 90%

No sooner the Mon­e­tary Board eased mon­e­tary pol­icy last week, the Cen­tral Bank has be­gun a cam­paign to push the banks to cut the rates of their ex­ist­ing and new lend­ing fa­cil­i­ties and has warned them with lend­ing rate caps if they fail to stick by the reg­u­la­tor’s in­struc­tions, Mir­ror Busi­ness learns.

In a let­ter sent to all banks on May 31, the same day the Mon­e­tary Board cut pol­icy rates by 50 ba­sis points to pro­vide mon­e­tary stim­u­lus to the mori­bund econ­omy, which re­ceived a lethal blow from the Easter car­nage, the head of the Bank Su­per­vi­sion Depart­ment of the Cen­tral Bank had sought in­for­ma­tion from the

banks on their ex­ist­ing lend­ing rates and loan repric­ing cy­cles.

Ac­cord­ing to bank­ing sector sources, this was the first time the Cen­tral Bank in the re­cent past had gone into the ex­tent of seek­ing in­for­ma­tion re­lat­ing to in­di­vid­ual loan port­fo­lios and pric­ing cy­cles of banks to mon­i­tor and in­flu­ence their pric­ing poli­cies.

Some bankers termed the move as “quite un­usual” and said the reg­u­la­tor had gone too far to shove down its in­ter­est rate pol­icy down the throat of the coun­try’s bank­ing sector, which de­cides on their pric­ing poli­cies, ac­cord­ing to mar­ket dy­nam­ics.

The let­ter had also cau­tioned that if the banks failed to bring down the lend­ing rates in tan­dem with the de­posit rates and the changes to the pol­icy in­ter­est rates, the Cen­tral Bank would be com­pelled to cap the lend­ing rates.

“It ap­pears that the Cen­tral Bank has suc­cumbed to the pres­sure from the gov­ern­ment to pro­vide mon­e­tary stim­u­lus to re­vive the econ­omy, which has long been slug­gish,” a bank­ing sector an­a­lyst told Mir­ror Busi­ness on grounds of anonymity.

The gov­ern­ment last week pro­vided fur­ther fis­cal stim­u­lus by way of an­nounc­ing a slew of sub­sidised in­ter­est rate loans, un­der its much-hyped En­ter­prise Sri Lanka loan scheme.

The gov­ern­ment said the stim­u­lus was aimed at sup­port­ing the small and medium en­ter­prises af­fected by the April 21 bomb at­tacks. Mean­while, in another in­ter­est­ing move, the Cen­tral Bank yes­ter­day is­sued a direc­tive to all banks giv­ing in­struc­tions to of­fer loan fa­cil­i­ties for elec­tric ve­hi­cles with 90 per­cent of the value of the ve­hi­cle, which is re­ferred to as the ‘Loan-to-value’ ra­tio or LTV in bank­ing jar­gon.

The direc­tive ef­fec­tively raised the LTV ap­pli­ca­ble on all cat­e­gories of elec­tric ve­hi­cles, in­clud­ing elec­tric three-wheel­ers up to 90 per­cent.

LTV ap­pli­ca­ble for mo­tor­cars and non-elec­tric three-wheel­ers will re­main at 50 per­cent and 25 per­cent, re­spec­tively.

The Cen­tral Bank also said the LTV ap­pli­ca­ble on all cat­e­gories of ve­hi­cles, which have been reg­is­tered in Sri Lanka for over one year, will re­main at 70 per­cent.

On April 26, the Cen­tral Bank re­leased a direc­tive to all li­censed banks cap­ping the rates of­fered on cus­tomer de­posits.

The banks did not protest at the de­posit rate caps as they were gear­ing to ben­e­fit from higher net in­ter­est in­comes from the lagged ef­fect stem­ming from the pass­ing down of that ben­e­fit to bor­row­ers by way of lower in­ter­est rates.

How­ever, some of the banks were un­able to pass the bor­rower the ben­e­fit sooner be­cause they had al­ready raised a large chunk of de­posits at higher rates, which ef­fec­tively places their fund­ing cost in the higher ter­ri­tory.

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