Economists express concern on public benefits of interest rate drop

Economists express concern on public benefits of interest rate drop

12 July 2020 12:09 am

The sudden drop in market interest rates offered by banks may not be beneficial as it seems, analysts said, as the Average Weighted Prime Lending Rate (AWPR) slid to 8.48 percent in June compared to 11.52 percent year ago.

Central Bank’s (CBSL) reduction of policy rates beyond a certain point may not expand credit growth as targeted by the Government because banks have limited risk appetite.

ICRA Lanka, which is part of Moody’s Investor Services, acknowledged steady credit flow to the real economy is imperative for the post-COVID19 recovery.

But it noted that in order to facilitate this, the CBSL needs to ensure financial institutes have both the capacity and the willingness to lend.

ICRA Lanka noted that financial institutions were on a weaker footing even before the COVID-19 crisis due to the Basel III capitalisation requirements, the deterioration in asset quality, and dwindling profitability due to macro factors.

Therefore, the risk appetite of financial institutes at the moment is low, it warned.

Analysts said the drop in interest rates, however, is a great opportunity to obtain long-term loans at low-interest rates and to retire and replace high-interest rate loans.

But in reality, with the current economic situation, it may not be that easy for the general public to restructure the expensive loans, they added.

Youth who actually lost jobs or have got salary cuts may have a difficulty in obtaining loans,” an economic analyst claimed.

The Central Bank had lowered deposit and lending rates for banks, to encourage banks to support businesses affected by the coronavirus pandemic.

However, he  said, considering the impact of the pandemic on businesses, banks would be more willing to lend to these creditworthy customers like large businesses.

“..it is really questionable whether the middle category businessmen or the Small and Medium Scale Enterprise category will be given loans,” he added.

Individuals who depend on interest earnings are likely to take a huge blow due to the drop in interest rates.

The Central Bank has said that individuals who have already obtained loans should request banks to apply the revised interest rates on their debt.