Bank lending grinds to a halt
The spike in Sri Lankan interest rates and the possibility of further increases in the short term have literally stopped customer borrowings from banks.
Interest rates for treasury bills (t-bills) rose sharply this week from single digit levels in January this year. For example 3-month t-bills rose to 23.21 per cent, 6-month bills at 24.77 per cent and 1-year bills at 24.36 per cent.
“Our lending has come to a grinding halt. With t-bill rates at 24 per cent, the lending rates are at around 27 per cent. The Average Weighted Prime Lending Rate (AWPLR) determined by the
average weighted deposit rate and the statutory reserve ratio is also climbing, and the high interest has definitely curtailed lending,” a senior banker in a large commercial bank told the Business Times on Wednesday.
A second banker said that his institution as well as other banks are now refraining from giving personal loans to customers. “Basically, the high-interest rate was introduced to curtail lending and it is working.”
He also said that such high rates are allowing for potential non-performing loans with the high-interest cost likely to deter people from paying the loans. Analysts say that small and medium- sized businesses will be unsustainable within the next few months.
The banks are expecting short-term revenue hikes but this will be followed by higher impairments. Analysts set the rate increases will impact the treasury bill portfolios of banks which in turn will impact their capital. They said that despite the increase in interest rates foreign exchange will not come in and the oil prices will not decline which translates into high inflation. The banks will pass this to the customers.
Meanwhile, the debt restructuring the country has embarked on will impact all the banks that are holding international sovereign bonds. “Based on the haircut suggested by the International Monetary Fund, the banks will go through the same pain as other bondholders,” an analyst said. A second analyst said that the ongoing citizen protests will further aggravate the woes of the financial services sector. He predicted the next 12 months to be tough for the banking industry in particular.