Sri Lanka: Central Bank Reduces Commercial Credit Rates

Sri Lanka’s Central Bank has called on all commercial banks to strictly observe the newly reduced credit interest rates. A Bank press release said that every Licensed Commercial Bank (LCB) is required “to reduce their weekly Average Weighted Prime Lending Rate (AWPR)1 by at least 250 basis points by December 27, 2019, compared to their AWPR published by the Central Bank of Sri Lanka as at April 26, 2019 in the Weekly Economic Indicators publication”.

Commercial banks face possible action if they do not comply with the Central Bank’s latest credit rate requirement.

The Central Bank press release states: “The Monetary Law Act Order No. 02 of 2019 on “Enhancing Efficiency of the Transmission of Recent Policy Decisions to Rupee Denominated Market Lending Rates” required, inter alia, every licensed commercial bank (LCB) to reduce their weekly Average Weighted Prime Lending Rate (AWPR) 1 by at least 250 basis points by December 27, 2019, compared to their AWPR published by the Central Bank of Sri Lanka as at April 26, 2019 in the Weekly Economic Indicators publication.

This shall not apply to LCBs, whose AWPR reaches or falls below 9.50 per cent per annum as at the date of this Order or anytime thereafter. The Central Bank observes that several LCBs have complied with the above Order, and in particular, some LCBs have reduced their AWPR sharply during the week ending December 27, 2019 from the previous week ending December 20, 2019 to meet this regulatory requirement.

Accordingly, the overall weekly AWPR has declined by 230 basis points from 12.24 per cent as at April 26, 2019 to 9.94 per cent as at December 27, 2019. This is the first time since April 29, 2016 that AWPR has declined to single digit levels.

As per the Order, any LCB shall not increase its AWPR, from the reduced level, and it is expected that market lending rates, particularly those linked to AWPR will continue to decline in the period ahead, with regular repricing. Nevertheless, it is also observed that People’s Bank, Commercial Bank of Ceylon PLC, Indian Overseas Bank, MCB Bank Ltd, Public Bank Berhad, Standard Chartered Bank, Amana Bank PLC and Axis Bank Ltd have failed to comply with the Monetary Law Act Order No. 02 of 2019.

The CBSL intends to take appropriate measures in relation to these banks, as well as those licensed banks that have not met with the other provisions of the Order, to ensure that the general public continues to benefit from an efficient transmission of recent policy decisions through the financial system.