The Central Bank will be imposing a cap on lending if the banks and financial institutions fail to reduce high lending rates, Central Bank Governor Indrajith Coomaraswamy told a media conference on Friday.
This action will be taken to accelerate monetary policy transmission through the financial sector, he said adding that a lending cap will be imposed individually if the banks and non bank financial institutions continue to levy high interest rates.
Dr. Coomaraswamy noted that lending cap enables licensed banks and non bank financial institutions (NBFI) to reduce their interest rates on lending products in general and to SMEs in particular.
The main aim is to enhance credit flows to the real economy; he said adding that when inflation has been brought down to single digit of 3 to 4 per cent business entities cannot afford to pay high interest rates of over 20 per cent.
The Central Bank has already issued a directive to banks and NBFIs to reduce interest rates on deposits.
The aim was to bring down lending rates by about 200 basis points but so far the rates have come down only by 31 basis points, he said.
Debt instruments issued by non-banking financial institutions will also be subject to maximum interest rates.
The Central Bank has also injected substantial rupee liquidity to the domestic market by reducing the Statutory Reserve Ratio (SRR).
The Monetary Board of the Central Bank at its meeting held on Thursday decided to further reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 50 basis points to 7 per cent and 8 per cent, respectively.
This will be reducing the cost of funds of banks and NBFIs and borrowers, particularly SMEs, can expect to obtain credit facilities at reduced interest rates from those institutions, Dr Coomaraswamy said.
Debt instruments issued by non-banking financial institutions will also be subject to maximum interest rates