- Failure to comply with Central Bank lending rate cap
- Regulator to decide on exact penalties next week
People’s Bank, Sampath Bank PLC, and DFCC Bank PLC face penalties from the Central Bank of Sri Lanka (CBSL) for its lack of compliance with lending rate caps imposed by the banking sector regulator.
On 24 September 2019, the CBSL ordered licensed commercial banks (LCBs) to reduce the weekly Average Weighted Prime Lending Rate (AWPR) by 150 basis points (bps) by 1 November and by at least 250 basis points by 27 December, compared to the AWPR as at 26 April 2019.
This cap was mainly imposed to increase private sector credit growth as the Year-on-Year (YoY) growth of credit disbursed to the private sector by LCBs during the first seven months of 2019 grew slower than the corresponding period last year.
“From next week onwards, we will start imposing certain penalties or sanctions. Otherwise, it is unfair on the banks that have complied. There are about seven banks that need to bring the rate down by another 50 bps, which is highly unlikely. Out of these seven, there are three big banks, namely People’s Bank, Sampath Bank, and DFCC Bank,” noted CBSL Senior Deputy Governor Dr. P. Nandalal Weerasinghe, addressing the press briefing of the eighth and final Monetary Policy Review of 2019.
However, he added that the exact penalties and sanctions these banks would suffer had not been determined as yet.
“We will have to discuss with the Monetary Board first. There are several provisions in the Banking Act, so we have to decide on the basis of the extent of deviation and other factors. After we see the figures, we will decide what kind of actions those would trigger on individual banks.”
He added that while there were smaller banks such as Axis Bank Ltd., Public Bank Sri Lanka, and Cargills Bank Ltd., which had also failed to comply with the directive, the main impact on private sector credit growth was from the non-compliance of bigger banks.
In November, The Sunday Morning Business exclusively reported that the banking industry had largely fallen in line with the Central Bank lending rate caps, with six banks having even reached the rates specified for December at the time.
We compared the AWPRs of 25 banks as at 1 November with those of 26 April and found that Citibank, Seylan Bank PLC, Union Bank Sri Lanka, DFCC Bank, ICICI Bank Ltd., and Cargills Bank had already brought down their lending rates by over 250 basis points, which was the level the CBSL instructed banks to reach by the end of December.
Amongst these banks, Cargills Bank, Union Bank, and Seylan Bank had cut down their rates by over 300 points while, even among them, Union Bank had brought down its rate by 523 basis points.
Meanwhile, 14 banks had complied with the rate cut which was required to be made by 1 November, as they had brought down their lending rates by over 150 basis points.
These banks were Bank of Ceylon, Hatton National Bank PLC, People’s Bank, Sampath Bank, Habib Bank Ltd., Commercial Bank of Ceylon PLC, Indian Bank, Pan Asia Banking Corporation, Indian Overseas Bank, Nations Trust Bank PLC, NDB Bank PLC, State Bank of India, Amãna Bank, and Axis Bank.
Amongst the 25 banks, four banks, namely HSBC Sri Lanka, Standard Chartered PLC, Deutsche Bank, and MCB Bank, had reduced its respective lending rates, but the reduction was below 150 basis points.
Interestingly, Malaysia-based Public Bank’s lending rate had increased by 12 basis points as at 1 November compared with that of 26 April. Banks with AWPRs at or below 9.5% are excluded from this compulsory rate cut. As at 26 April, none of the banks had their lending rates below this threshold.
However, HSBC and State Bank of India, after reductions of 125 and 214 basis points, respectively, from their April levels, had qualified into this category as their lending rates were 8.59% and 9.36%, respectively, and did not require further reduction.
Meanwhile, the weekly AWPR came under 11% for the first time in more than a year in July this year.
The prime lending rate is the interest rate charged by Sri Lanka’s banks from their largest, most secure, and most creditworthy customers on short-term loans. This rate is used as a guide for computing interest rates for other borrowers. The weekly AWPR is the average prime lending rate among banks in a particular week.
A lower rate means more access to finance for businesses and entrepreneurs, enabling greater economic activity and growth. A week into the Easter Sunday incident, the AWPR went up to 12.24% from 11.99%, while during the political turmoil, which erupted on 26 October 2018 and lasted 51 days, the least AWPLR was 11.81% while the highest was 12.28%.
People’s Bank, Sampath Bank PLC, and DFCC Bank PLC face penalties from the Central Bank of Sri Lanka (CBSL) for its lack of compliance with lending rate caps imposed by the banking sector regulator.
On 24 September 2019, the CBSL ordered licensed commercial banks (LCBs) to reduce the weekly Average Weighted Prime Lending Rate (AWPR) by 150 basis points (bps) by 1 November and by at least 250 basis points by 27 December, compared to the AWPR as at 26 April 2019.
This cap was mainly imposed to increase private sector credit growth as the Year-on-Year (YoY) growth of credit disbursed to the private sector by LCBs during the first seven months of 2019 grew slower than the corresponding period last year.
“From next week onwards, we will start imposing certain penalties or sanctions. Otherwise, it is unfair on the banks that have complied. There are about seven banks that need to bring the rate down by another 50 bps, which is highly unlikely. Out of these seven, there are three big banks, namely People’s Bank, Sampath Bank, and DFCC Bank,” noted CBSL Senior Deputy Governor Dr. P. Nandalal Weerasinghe, addressing the press briefing of the eighth and final Monetary Policy Review of 2019.
However, he added that the exact penalties and sanctions these banks would suffer had not been determined as yet.
“We will have to discuss with the Monetary Board first. There are several provisions in the Banking Act, so we have to decide on the basis of the extent of deviation and other factors. After we see the figures, we will decide what kind of actions those would trigger on individual banks.”
He added that while there were smaller banks such as Axis Bank Ltd., Public Bank Sri Lanka, and Cargills Bank Ltd., which had also failed to comply with the directive, the main impact on private sector credit growth was from the non-compliance of bigger banks.
In November, The Sunday Morning Business exclusively reported that the banking industry had largely fallen in line with the Central Bank lending rate caps, with six banks having even reached the rates specified for December at the time.
We compared the AWPRs of 25 banks as at 1 November with those of 26 April and found that Citibank, Seylan Bank PLC, Union Bank Sri Lanka, DFCC Bank, ICICI Bank Ltd., and Cargills Bank had already brought down their lending rates by over 250 basis points, which was the level the CBSL instructed banks to reach by the end of December.
Amongst these banks, Cargills Bank, Union Bank, and Seylan Bank had cut down their rates by over 300 points while, even among them, Union Bank had brought down its rate by 523 basis points.
Meanwhile, 14 banks had complied with the rate cut which was required to be made by 1 November, as they had brought down their lending rates by over 150 basis points.
These banks were Bank of Ceylon, Hatton National Bank PLC, People’s Bank, Sampath Bank, Habib Bank Ltd., Commercial Bank of Ceylon PLC, Indian Bank, Pan Asia Banking Corporation, Indian Overseas Bank, Nations Trust Bank PLC, NDB Bank PLC, State Bank of India, Amãna Bank, and Axis Bank.
Amongst the 25 banks, four banks, namely HSBC Sri Lanka, Standard Chartered PLC, Deutsche Bank, and MCB Bank, had reduced its respective lending rates, but the reduction was below 150 basis points.
Interestingly, Malaysia-based Public Bank’s lending rate had increased by 12 basis points as at 1 November compared with that of 26 April. Banks with AWPRs at or below 9.5% are excluded from this compulsory rate cut. As at 26 April, none of the banks had their lending rates below this threshold.
However, HSBC and State Bank of India, after reductions of 125 and 214 basis points, respectively, from their April levels, had qualified into this category as their lending rates were 8.59% and 9.36%, respectively, and did not require further reduction.
Meanwhile, the weekly AWPR came under 11% for the first time in more than a year in July this year.
The prime lending rate is the interest rate charged by Sri Lanka’s banks from their largest, most secure, and most creditworthy customers on short-term loans. This rate is used as a guide for computing interest rates for other borrowers. The weekly AWPR is the average prime lending rate among banks in a particular week.
A lower rate means more access to finance for businesses and entrepreneurs, enabling greater economic activity and growth. A week into the Easter Sunday incident, the AWPR went up to 12.24% from 11.99%, while during the political turmoil, which erupted on 26 October 2018 and lasted 51 days, the least AWPLR was 11.81% while the highest was 12.28%.