• Effects of decision to limit standing lending facilities to LCBs kick in

The Average Weighted Prime Lending Rates (AWPRs) of most Licensed Commercial Banks (LCBs) have recorded a slight easing in numbers, according to Central Bank of Sri Lanka (CBSL) data for the week ending on 27 January. 

The AWPR was over and above 28% for the past few months due to decisions taken by the Central Bank to increase the rates and maintain them at their current levels. The rates are now slowly and marginally decreasing, as per the data. 

As LCBs have continued to depend excessively on the overnight standing facilities under Open Market Operations (OMOs) of the Central Bank without considering market-based funding options to address their structural liquidity needs, the Central Bank decided to impose restrictions on the availability of standing facilities to LCBs under the OMOs. 

Hence, with effect from 16 January, the Standing Deposit Facility (SDF), the overnight deposit facility that allows LCBs to park excess liquidity and earn interest, will be limited to a maximum of five times per calendar month. 

At the same time, the Standing Lending facility (SLF), which is the collateralised facility provided to LCBs to fulfil any further shortage of the liquidity requirements from the Central Bank at the end of the day, will also be limited to 90% of the Statutory Reserve Requirement (SRR) of each LCB on any given day.

These measures have been implemented after carefully considering the current and expected developments in the domestic money market as well as the behaviour of LCBs in terms of the utilisation of the standing facilities. 

“The imposition of the limitations on the standing facilities is expected to reduce over-dependence of LCBs on the overnight facilities offered by the Central Bank and support the reactivation of the domestic money market, which remained nearly inactive for the last few months, while encouraging LCBs to transact among themselves,” the Central Bank has said. 

These measures will also eliminate unhealthy competition for deposits among financial institutions and will be instrumental in inducing a moderation in the market interest rate structure (of both deposit and lending interest rates) in the period ahead while improving market liquidity conditions, which will help to restore the stability of the Sri Lankan economy while preserving the stability of the financial system.

– By Tanya Shan