But negotiations likely on 30% range for credit cards
Sri Lanka’s private commercial banks are likely to respond positively to the recent call made by the Central Bank of Sri Lanka (CBSL) to lower interest rates on housing loans to 14 percent by the end of next month although they would appeal for a lower rate reduction on credit cards, a top industry official said.
CBSL on Thursday requested all private commercial banks to reduce interest rates on credit cards to 24 percent per annum, by the end of next month, following steep falls in policy rate cuts and lower economic risks.
“As far as housing loans are concerned, most of the banks have already reduced their rates in line with the Central Bank’s recent guideline even before the announcement came in. However, with regard to the recently requested rate reduction on credit cards, the association is mulling on negotiating the rate with the CBSL,” Sri Lanka Banks’ Association secretary-general Upali de Silva told The Bottom Line.
He said ‘most banks’ are keen on appealing to the Central Bank to make the rate on credit cards to hover around 30 percent given the high-risk factor prevalent in the business.
“We should understand that even the regional average rate on credit cards is also around the 30 percent range and for example in India it is about 32 percent,” De Silva added.
Meanwhile, when The Bottom Line spoke to Saliya Rajakaruna, the chief executive at Nations Trust Bank and one of the comparatively smaller banks operating in the island, he said the bank would respond positive by making efforts to comply with the request for rate-cuts on housing loans by the stipulated deadline.
“However, as far as reducing rates on credit cards is concerned, we will need some more time as the operating model for credit cards is fairly different,” he said.
In a statement made earlier in the week, CBSL had argued that since February 2009, its policy repurchase rate (at which money is injected to the market) has been cut by 300 basis points to 9 percent and the repurchase rate (at which money is drained from the market) has been cut by 300 basis points.
“Nevertheless, it has been noted that adjustments to lending rates of financial institutions generally tend to lag behind the adjustments to their cost of funds. Hence, it is expected that market lending rates would decline further in the period ahead, to fully reflect the recent relaxation of the monetary policy stance of the Central Bank,” the Central Bank said in its September monetary policy review.
The CBSL noted that the current macro economic performance and stability warrant a reduction in the risk premia added to lending rates, thus leading to the spread between lending rates and deposit rates of banks reducing further.
According to Central Bank statistics, loans from commercial banks to the private sector rose by 8.9 percent up to July 2010 from a year earlier while credit from all banks and finance companies had increased 9.9 percent in July from a year earlier.
In July alone, loans from commercial banks rose 23.4 billion rupees to 1,292 billion rupees compared to a 105 billion rupees increase for the preceding 12 months.
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