Bank lending rates surge as monetary tightening takes hold

Prime lending rate flirts near 20% while credit cards re-priced at 30%; pawning at 25%

In comparison AWPLR was at a historically low level of 5.74% a year ago

Temporary overdraft rates at 30% levels; housing loans priced at 18-20%

“We have raised rates to levels that effectively send borrowers back,” says banker

The bank lending rates are adjusting at a lightning speed in response to the sharp tightening in the monetary policy following the unprecedented 700 basis points policy rate hike by the Central Bank on April 8.

Banks are seen tightening the credit standards at a rapid pace in a bid to virtually close the lending taps they wide opened in 2020 and 2021.

The Average Weighted Prime Lending Rates (AWPLR) or the benchmark rate at which most short-term loans are priced for banks’ most prime customers touched nearly 20 percent by the end of last week.

The weekly AWPLR rose by a sharp 317 basis points in last week alone, settling at 19.55 percent.

In comparison, the benchmark rate was at a historically low level of 5.74 percent a year ago when the money conditions were much easier.

The policymakers at the time never forewarned the people of the impending crisis and continued business as usual without drawing a contingency plan to blunt the effects from the loss of billions of dollars worth foreign exchange inflows from tourism, remittances, exports, investments and borrowings.

Sri Lanka lost about US$ 20 billion in foreign inflows during 2020 and 2021 from above sources due to pandemic-induced lockdowns myopically introduced by the world governments. Sri Lanka has about US$ 4.5 billion per annum to settle in foreign currency debt up until 2025. This shows Sri Lanka’s problem during the two years was more of a crisis in its Balance of Payment than a budget crisis.

In any case, it now appears that the policymakers at the time were operating only on hope and not on strategy.

As a result, 22 million people are now going through a nightmare in their everyday lives with the absence of cooking gas, fuel, medicine, milk powder and many other things.

The botched rupee float on March 7 pushed the country into hyperinflation with official food prices now rising at nearly 50 percent. Meanwhile, banks also sharply raised their credit card rates last week to 30 percent while the pawning rates are at 24 percent, almost doubled from where they were.

The temporary overdraft rates are also at 30 percent levels in some banks while the housing loans are now priced at 18 to 20 percent, making it virtually impossible even to think of home mortgages for years to come.

Banks have virtually shut their lending taps except for their existing clients and no new clients are entertained.

“In fact we have raised rates to levels to effectively send the borrowers back,” one banker said.

It appears that the Central Bank is tightening its monetary policy to kill demand and thereby tame inflation. However, the Sri Lankan consumers weren’t in a good shape when they entered this economic crisis and thus these austerity measures could push them into hunger and dire poverty.

The United States Federal Reserve raised its federal funds rate by 50 basis points last week, the sharpest since 2000, penciling in a sequence of similar rate sized moves in the next meetings to bring back inflation to the 2 percent target levels from the current 8.5 percent. However, the US consumers can withstand the higher cost of money because their economy is relatively strong and they entered into this tightening cycle with stronger wallets. Hence Fed Chair Jerome Powell last week said they expect a “softish” landing of the economy, as opposed to tipping it into a recession.