June 18, 2014 (LBO) - Sri Lanka's central bank held policy interest rates at 6.5 and 8.0 percent but urged banks to narrow spreads by cutting lending rates, as credit growth continued to be slow.
The Central Bank said it was "of the firm view that the banks now have adequate space to reduce market lending rates further" to boost credit demand, as deposit rates have fallen over the past few months.
"Accordingly, the Monetary Board also decided to urge banks to lower their market lending rates in order to reflect these changing circumstances."
In April private sector credit grew 3.3 percent from a year earlier, the monetary authority said in its May policy review indicating that private sector credit stock may have shrunk by about 15 billion rupees in April.
In the first two months of the year private credit shrank as banks cut back on gold backed loans after prices of the precious metal fell and defaults rose.
"However, with the realisation of the effects of the eased monetary policy stance, a turnaround in credit growth could be expected in the second half of the year," the Central Banks said.
"The implementation of the credit guarantee scheme in relation to pawning advances is also expected to further stimulate private sector credit growth."
Many firms are busy trying to refinance their loans at lower rates as market rates fell, some bankers said. In some cases borrowers were moving to the first banks to offer lower rates and repaying high interest loans.
Deputy Governor Nandalal Weerasinghe said Tuesday such market developments would help bring down interest rates to levels in line with deposit rates.
Some firms who had over leveraged themselves during the bubble years up to 2011 were also trying to sell assets and strengthen their balance sheets, analysts say, which takes time.
However following the de-leveraging process such firms would emerge stronger for an expansion phase.
The Central Bank said firms were also borrowing abroad and going to securities markets where rates have fallen.
The Central Bank said it was "of the firm view that the banks now have adequate space to reduce market lending rates further" to boost credit demand, as deposit rates have fallen over the past few months.
"Accordingly, the Monetary Board also decided to urge banks to lower their market lending rates in order to reflect these changing circumstances."
In April private sector credit grew 3.3 percent from a year earlier, the monetary authority said in its May policy review indicating that private sector credit stock may have shrunk by about 15 billion rupees in April.
In the first two months of the year private credit shrank as banks cut back on gold backed loans after prices of the precious metal fell and defaults rose.
"However, with the realisation of the effects of the eased monetary policy stance, a turnaround in credit growth could be expected in the second half of the year," the Central Banks said.
"The implementation of the credit guarantee scheme in relation to pawning advances is also expected to further stimulate private sector credit growth."
Many firms are busy trying to refinance their loans at lower rates as market rates fell, some bankers said. In some cases borrowers were moving to the first banks to offer lower rates and repaying high interest loans.
Deputy Governor Nandalal Weerasinghe said Tuesday such market developments would help bring down interest rates to levels in line with deposit rates.
Some firms who had over leveraged themselves during the bubble years up to 2011 were also trying to sell assets and strengthen their balance sheets, analysts say, which takes time.
However following the de-leveraging process such firms would emerge stronger for an expansion phase.
The Central Bank said firms were also borrowing abroad and going to securities markets where rates have fallen.
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