Cap on credit card interest rates removed to curb personal loans

Central Bank Governor Dr. Indrajith Coomaraswamy (L) addressing the media while Deputy Governor Dr Nandalal Weerasinghe looks on.Pic by Sujatha Jayaratne. 

By Hiran H.Senewiratne-June 23, 2017, 12:00 pm 

The Central Bank has issued a directive to all commercial banks to the effect that the cap on credit card interest rates should be removed and instructed them to charge competitive interest rates with effect from June 26. The reason being to discourage the number of personal loans, Central Bank Governor Dr Indrajit Coomaraswamy said.

"All commercial banks could  charge a competitive interest rate on credit cards  to discourage unproductive short term personal loans or lending , which have increased during the recent past, Dr Coomaraswamy said at the monthly monetary policy review meeting held at the Central Bank auditorium yesterday.

He said that personal loans are most of time being used for consumption and not help reap any economic benefits. Therefore, the Central Bank has issued a directive to all commercial banks to charge competitive interest rates on credit cards.

'The total credit card debt is 3 percent to 4 percent of the GDP, which is a very high amount. These are mainly personal loans, he said.

The Governor also said that the country's macro economic fundamentals are strong; the government's fiscal consolidation is on track and the CBSL will maintain a monetary policy to sustain economic development.

"This is in line with the government's road map. It would  enabled to reduce inflation, stabilize interest rates in the country in the future due to all economic fundamentals being on track, he said

He also said that the country's foreign reserves amount to US$ 7 billion and are expected to increase to US$ 7.2 billion before the end of the year."However, those foreign reserves are borrowed funds."

Further, Sri Lanka kept rates unchanged in June, but the Central Bank raised a red flag on rising borrowings by state-owned enterprises, although central government revenues were improving.

Sri Lanka's economy grew 3.8 percent in the first quarter, with bad weather hurting agriculture and electricity generation."Growth in the first quarter was weighed down by the impact of unfavourable weather conditions, particularly on agriculture-related activities, he said.

"The performance of industry-related activities was largely driven by the continued expansion in construction, while services-related activities recorded moderate growth. The economy is expected to recover during the second half of the year."

"The recent expansion in credit obtained by state-owned business enterprises poses a risk to the behaviour of overall domestic credit, reflecting the need to address concerns in relation to the financial performance of key SOEs, the Central Bank said in its June monetary policy statement.

Credit to SOEs rose to Rs. 557 billion in April 2017 from Rs. 495 billion in December 2016 as oil prices rose and a drought forced more thermal generation of electricity, reversing a trend of a net payback in loans seen up to the third quarter of 2016.However, since May, oil prices have begun to ease, though they remain at much higher levels than in 2016.Sri Lanka is still gripped by a drought and does not have a mechanism to adjust energy prices. The lack of a price formula for fuel and the frequent adjustment of electricity prices pose threats to the credit system, the economy and the exchange rate, economists have pointed out.However, private credit was slowing now, and better revenue collection was also helping reduce central government borrowing."The growth of credit to the private sector continued to decelerate gradually, the Central Bank said.

Further deceleration in growth of credit to the private sector is anticipated, given the prevailing high nominal and real lending rates in the market."As the impact of the revisions to the tax structure and weather-related supply disruptions are expected to dissipate in the period ahead, inflation is projected to moderate to mid-single digits by the end of 2017, and stabilise thereafter," the Central Bank said.