Sri Lanka (The Island) - The Central Bank signaled Monday that a high profile committee is working on bridging the gap between benchmark interest rates and bank lending rates while the Central Bank itself would do its bit with monetary policy tools to bring lending rates down as the Bank is baffled by decelerating credit to the private sector by the banks which would be detrimental to the overall economic growth of the country.
If the 13.5% annual private credit growth target for 2019 is to be achieved, credit growth has to average 75 billion rupees per month for the rest of the year and this is still far from happening given the high deposit and lending rates of the banks, reflecting a 'disjuncture' between the benchmark government securities interest rates and bank rates, according to Central Bank Governor.
"All the benchmark interest rates such as call money/reverse repo rates and treasury bills rates have come down significantly this year, but deposit and lending rates are still going up reflecting disjuncture there, he said.
"The margin between the benchmark rates and bank lending rates needs to be addressed. There is a 200 basis point margin between benchmark rates and retail lending rates. That's far too large, he said.
"First, we will tackle this disjuncture and then look at the policy rates. Sri Lanka needs higher credit growth to reach an economic growth of 4 percent in 2019, Coomaraswamy said.
"The Central Bank Monetary Board is of the view that if the current trends in global financial markets and Sri Lanka's trade balance and credit growth continue at the expected momentum, policy interest rates could be reduced in the period ahead, given well anchored inflation and inflation expectations, he further said.
"The trend that retail lending rates at banks have not fallen in line with benchmark rates came under discussion at a meeting chaired by Prime Minister Ranil Wickremasinghe recently, he said.
"All bank CEOs participated in this meeting. A committee comprising three bank CEOs, two chartered accountants chaired by Monetary Board Member Nihal Fonseka was set up to address this rates discrepancy and help grow private sector credit. They will recommend specific actions to reduce the this gap, Coomaraswamy explained..
" The Committee is doing a good job. I can't divulge the details. The report will be handed to the Prime Minister on Thursday, he said.
" On the macro side, we are broadly within the framework. Now the election cycle is coming up. But we must sustain the sweet spot we are in, in terms of macro variables, the Governor emphasised.
CBSL Governor made these comments on Monday addressing the media after the Monetary Board of the Central Bank decided to maintain policy interest rates at their current levels.
Sri Lanka's private credit fell by 4.3 billion rupees in January and grew by 7.6 billion rupees in February.
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