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Lending policy by banks in sri lanka - By Nitish Kaushik

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Lending policy by banks in sri lanka - By Nitish Kaushik

  1. 1. LENDING POLICYBY BANKS IN SRI LANKA BY: - NITISH KAUSHIK
  2. 2. SRI LANKA BANK LENDING RATEBank Lending Rate in Sri Lanka decreased to 14.30percent in January of 2013 from 14.40 percent inDecember of 2012. Bank Lending Rate in Sri Lanka isreported by the Central Bank of Sri Lanka. Historically,from 1997 until 2013, Sri Lanka Bank Lending Rateaveraged 13.97 Percent reaching an all time high of23.20 Percent in January of 2001 and a record low of8.90 Percent in November of 2003. In Sri Lanka, thePrime lending rate, is the average rate of interestcharged on loans by commercial banks to privateindividuals and companies. The prime rate is estimatedweekly by the Central Bank of Sri Lanka.
  3. 3. Chart showing historical data for Sri Lanka Bank Lending Rate
  4. 4. LENDING TO NON RESIDENTSDomestic Bank Units of licensed commercial banksand licensed specialised banks are not allowed to lendto non-residents including companies incorporatedoutside SriLanka at present due to the capital account control.However, Offshore Bank Units of licensed commercialbanks are allowed to lend to non-residents without anyrestrictions in the provisions of the Banking Act andthe Banking (Offshore Banking Scheme) Order of2000 issued by the Central Bank.
  5. 5. STEADY POLICY RATES BY BANKS IN 2009Sri Lankas central bank held policy rates steady at 11.00percent during the month of Aug, 2009 saying marketinterest rates were falling, inflation is bottoming out butexpected to remain at single digits in 2009.According to the Central Bank report the average weightedprime lending rate has declined by about 415 basis points,by July 2009. Sri Lankas commercial bank prime lendingrate, a price given to a banks best clients averaged 14.18percent on August 14, 2009 according to Central Bank data.Credit to private sector from commercial banks fell 5.2percent to 1,212 billion rupees in June compared toDecember 2009.
  6. 6. Economic Environment in Sri Lanka with Relevance to ADB Policy-Based Loans1986−1991• Unstable macroeconomic environment• Persistent budget deficit• Distorted pricing of agricultural inputs and products• Lack luster agriculture sector performance• Loss-making state-owned enterprises• High financial intermediation costs in the financialsector1992−1999• During this period, there was no new ADB policy based loan
  7. 7. CONTD.2000–2004• Initiatives to promote governance• Efforts to improve public enterprise management• Growing budget deficit and deteriorating fiscalperformance• Public debt exceeded 100% of gross domesticproduct from 2001 to 2004• Efforts to improve policy and regulatory framework• Efforts to improve institutional performance• Underdeveloped rural financial markets• Continuing labour market rigidities2005 to Date• Government emphasis on the role of the publicsector• Efficiency improvements of state-owned enterprises• Government will not privatize state-owned entities
  8. 8. LENDING POLICY ADOPTED BY THE CENTRAL BANK OF SRI LANKA IN THE YEAR 2012The Central Bank of Sri Lanka (CBSL) announced that it had raised policy ratesfor the first time since 2007 in a bid to check runaway credit growth. The Bankhas hiked rates by 50 basis points and enforced a credit ceiling in the face ofpressures. The repurchase rate and the reverse repurchase rate of the Central Bankwas 7.50 per cent and 9 per cent respectively.The Board viewed with alarm the “continuous increase in credit extended to theprivate sector by commercial banks” and said that this needed to be addressed tocurtail import-related credit (thereby reducing the trade deficit and the current-account deficit) and ensure that inflation remains at the mid single-digit levels inthe second half of 2012 as well.The Monetary Board also decided to direct commercial banks to moderate theircredit disbursements so that the overall credit growth in 2012 does not exceed 18per cent of their respective loan book outstanding at the end of 2011. Creditgrowth of up to 23 per cent will be allowed for those banks which finance theexcess up to 5 per cent of the credit growth, from funds mobilised from overseas.
  9. 9. IMF’s VIEW OF THE LENDING POLICY OF 2012IMF welcomed the hike in rates and credit ceiling, saying that thiswould help rein in loan growth and narrow a widening externaldeficit in Sri Lanka. The IMF maintained that exchange rateflexibility should be part of the policy package.“There was broad agreement that a decisive policy response wasneeded to put the economy on a sounder macroeconomic footing,especially given the current uncertain global environment,” saidBrian Aitken, who led an IMF review team, in a statement.
  10. 10. ConclusionAs was the case in 2012, the CBSL willcontinue to safeguard the flexibility of thelending policy in line with changing globalconditions and ensure predictability througheffective communication. The lendingpolicy will continue to contribute to thesustainable growth prospects of Sri Lankaneconomy in the context of price stability.
  • PavithraKarunasiri

    Jun. 4, 2017

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