Among the efforts to establish uniformity in interest rates, the Central Bank of Sri Lanka (CBSL) is to ensure that the banks adhere to the policy rates and any institutions fall short of aligning with these directives, a multi-step approach is in place, The Daily Morning Business learnt.
Speaking to The Daily Morning Business, CBSL Senior Deputy Governor T.M.J.Y.P Fernando said:“In 2019, we did some similar exercise and they complied, and in the case of the banks that do not comply, we kind of request them and make them comply. However, in instances of persistent noncompliance, the authorities have invoked Section 104 of the Monetary Act, enabling the Monetary Board to deliberate on appropriate actions.”
During the monthly meetings where the key industry players including CEOs of prominent financial institutions attend, efforts are made by CBSL to encourage banks to align their practices with the circular's provisions. Accordingly, the authorities are optimistic that the established timeline, extending until October and December, will provide banks with ample time to adjust, with only three items expected to be immediately implemented.
The Monetary Board of the CBSL has issued an Order instructing licensed banks to lower interest rates on various lending products.The directive specifies a reduction in rates for pawning facilities, pre-arranged temporary overdrafts and credit card advances, effective from the upcoming billing cycle. Licensed banks are required to decrease the annual nominal interest rates on all existing and new Sri Lankan rupee (LKR)-denominated lending products, excluding specific credit card facilities, by a minimum of 250 basis points by 31 October 2023, followed by an additional 100 basis points by 31 December 2023.
Amidst the directive to align interest rates, a handful of banks stand as outliers. These banks are urged to decrease interest rates, contingent on their individual cost of funds.Simultaneously, certain banks may need to elevate deposit rates to counterbalance these adjustments. Consequently, a gradual reduction in interest rates is expected from these banks.However, the circular is designed to expedite the passing on of benefits to borrowers, aiming for a more swift and uniform rate adjustment process, Fernando noted.
However, if any lending product's annual nominal interest rate is 13.5% or lower as of 25 August or thereafter, the mandatory reduction is not applicable. Furthermore, for lending products with rates of 13.5% or less as of the Order date, banks are prohibited from raising rates above the August 25 levels.
The circular's issuance highlights the ongoing commitment to promote fairness within the financial landscape. As the financial community awaits the outcome, the industry's response to the circular will likely set a precedent for future interventions aimed at fostering equilibrium and swift benefits for consumers.