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Intermediaries profiting with slower decline in interest rate spread – Borrowers Association

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General Secretary  Asanka Pothupitiya
General Secretary Asanka Pothupitiya

The Joint Association of Leasing and Debt Instalment Payers (LDP) has called attention to the slow movement of the interest rate spread initially in the Treasury Bill and Bond market and subsequently in the bank borrowing rates. They further allege that the slow transmission of monetary policy has had disastrous consequences for the efficacy of monetary policy.

LDP General Secretary Asanka Ruwan Pothupitiya said, “We are not fools. We only take loans intending to pay them back. We implore the public to see the artificially inflated rate regime.” Pothupitiya further alleged that the dysfunctionality of the system was apparent as institutions were not recovering on vehicles as they did not want to dip the market value of the collateral.

Pothupitiya was speaking to his association and the general public on January 20 via a virtual meeting. The cost of financing has ballooned. The Central Bank has lost control over rates. The entire financial sector is focused on pushing new funds into government securities to benefit from the large spread at a risk-free rate on the Treasury Bill Stock. That security is unlikely to fall within the remit of a domestic debt restructuring.

The Central Bank is partially responsible for the long-term conflict of interest through its management of debt raising for the government. State corporations notably the Ceylon Electricity Board have placed a strain on the available liquidity of the major state-owned banking entities. Pothupitiya called on the State Banks as opposed to minuscule Primary Dealers to use the to-date untouched Liquidity Support Facility under the Central Bank through the pledging of State Corporation Debt to make money on the declining spread of interest rates. They note that a decline in interest rates will have a significant impact on reducing the break-even prices that state corporations have to charge the general public. The Central Bank could further improve the transmission of monetary policy through the establishment of a 1 monthly Treasury Bill. Under the current system, Primary Dealers stand to make huge profits on the mark-to-market value of any 3 Month Treasury Bill.

Pothupitiya further alleged that discontent could become generational if the Central Bank did not clearly communicate the impending reduction in interest rates in Sinhalese. They note that unsophisticated borrowers and savers may be missing out on economic gains by not acting on the disparities in market rates.

Pothupitiya called for at least the same degree of forbearance given to the assets of the elite.

The condominium sector has an underlying asset that has shown a large decline in value. There has been an increase in the value of vehicles.  

 Pothupitiya noted that the forced recovery of the latter as opposed to the former was reflective of the fractures in society. Pothupitiya further called upon the public to realise that though the value of the vehicle stock had risen considerably, the members of his association had not used this as a basis to increase the prices of their services.

The price increases were based on fuel and cost of living rises. The Central Bank has failed in its role in reducing informational asymmetry in its lack of communicated data on pricing. With the advent of the Expressway network and the growing wealth of the country, there is a larger proportion of vehicle stock that has become decrepit. (TP)

 

Tuesday, January 24, 2023 – 01:00











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