Home » CBSL Enforces Interest Rate Reduction on Licensed Banks’ Lending Products

CBSL Enforces Interest Rate Reduction on Licensed Banks’ Lending Products

The Central Bank of Sri Lanka (CBSL) has taken decisive action by issuing an Order to lower interest rates on lending products provided by all licensed commercial banks (LCBs) and licensed specialized banks (LSBs), effective from August 25th. This directive applies to a range of lending products including pawning facilities, pre-arranged temporary overdrafts, credit card advances, and both new and existing loans denominated in Sri Lanka Rupees (LKR). The CBSL’s Order outlines the maximum interest rates applicable to LKR-denominated lending products, emphasizing the need for reductions to ensure that lending rates align with the current monetary policy stance. Despite previous efforts to ease monetary conditions through policies such as reducing policy interest rates and the statutory reserve ratio, some financial institutions have maintained excessively high interest rates on lending products. This situation poses challenges for individuals and businesses. In response, the Monetary Board of the CBSL issued a directive to licensed banks. The order stipulates that pawning facilities should carry an annual interest rate of 18%, pre-arranged temporary overdrafts should carry a rate of 23%, and credit card advances should be subject to an interest rate of 28%, all beginning with the next billing cycle. Furthermore, the CBSL has mandated that licensed banks reduce the annual nominal interest rates for all new and existing LKR-denominated lending products (excluding credit card facilities and other categories) by a minimum of 250 basis points by October 31, 2023, and an additional 100 basis points by December 31, 2023. This reduction is in comparison to the interest rates prevailing as of July 31, 2023. However, the CBSL clarifies that if the annual nominal interest rate for any LKR-denominated lending product is already 13.5% or lower as of August 25 or any time thereafter, the mandatory reduction is not applicable. Additionally, if the applicable annual nominal interest rate as of the effective date or any time thereafter is 13.5% or lower, licensed banks are instructed not to increase interest rates on such lending products beyond the levels maintained as of August 25. This move by the Central Bank of Sri Lanka underscores its commitment to fostering a lending environment that aligns with the prevailing monetary policy objectives and supports the economic well-being of both individuals and businesses in the country.

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