Banks warned of lending rate caps

„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.