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Banks urged to pass reduced lending rate benefits to public

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Most of the local banks are yet to pass on the full benefits of the reduced lending rates to their customers, said Central Bank Governor Dr. Nandalal Weerasinghe releasing the “Annual Policy Statement – 2024” at CBSL Head Office, yesterday.

He said local banks that have not fallen in line should do so and offer a low interest rate for their borrowers. The gradual normalisation of market lending interest rates and improving investor and business sentiments are expected to support the expansion of credit to the private sector, thereby allowing the economy to reach its potential. To facilitate the sustainable revival of businesses affected by the recent challenging macroeconomic circumstances and to ensure the proper handling of the increased levels of impaired assets of licensed banks should set up Revival Units. ‘This is to further strengthen their role in the recovery of businesses, especially Small and Medium Enterprises (SMEs) and corporate.’

The Governor also said that they are taking measures to encourage consolidation of Non-Bank Financial Institutions, and improving their robustness and resilience over the medium term. This is expected to strengthen their resilience in times of uncertainty and improve their capacity to absorb economic shocks, while continuing to support the credit needs of customers, by maintaining sufficient capital.

With a view to enhancing the effectiveness of monetary policy implementation as well as catering the current and future developments, a user-friendly system for Open Market Operations (OMOs) would be introduced, with a smooth transition to the new auction system by 2025. The Central Bank successfully launched Phase 1 of the International Transactions Reporting System (ITRS) in 2023 to collect data on cross-border transactions and foreign currency transactions daily from the banking system. The Central Bank plans to report monthly data pertaining to the external current account, particularly on trade in services, based on ITRS data from 2024 onwards. Going forward, all banks are urged to continue to support the development of the ITRS system and to ensure the coverage, accuracy and timeliness of data.

Further, an OMO auction schedule will be introduced in 2024 that helps create certainty on liquidity management among market participants. With the objective of ensuring strong and adequately capitalised licensed banks, the Central Bank has developed a Roadmap for the restructuring and recapitalisation of nine large banks. This seeks to address capital and foreign exchange liquidity shortfalls identified through a diagnostic exercise and forward-looking stress testing based on macro-financial scenarios and sovereign debt restructuring. The legal and regulatory framework of licensed banks is to be further strengthened through the proposed amendments to the Banking Act.

He said that a new Banking (Amendment) Bill is expected to be passed in Parliament in early 2024 and this will strengthen the CBSL. (SS)

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