The lending rate cap recently imposed by the Central Bank of Sri Lanka (CBSL) on rupee-denominated loans extended by Sri Lankan banks may not improve loan growth in the short term, Fitch Ratings says.
To the extent banks cannot price for risk in order to make hurdle rates of return, they may extend less credit for riskier consumer and commercial loans that carry higher losses.
Lower lending rates may not be sufficient to spur credit demand to stimulate economic growth, given the nation’s weak borrower sentiment and subdued economic activity.
The Banking sector loans contracted by 0.5% at the end of June 2019 from December 2018, driven by a reduced appetite for lending among banks and weakened credit demand against a challenging operating environment.
The CBSL directive to cap lending rates was a response to regulatory concern over deceleration in credit demand and continued increases in nonperforming loans (NPLs). The CBSL’s actions are intended to accelerate the effects of previous measures to reduce lending rates, including a reduction in policy rates, a decrease in the Statutory Reserve Ratio and a cap on rupee deposit interest rates that has since been lifted with the introduction of the lending rate cap.
Bank profits, already weakened by higher credit costs and effective tax rates, could see further pressure given our expectation of continued subdued loan demand. In the near term, the lending rate cap may have a limited impact on bank net interest margins.
Add new comment