The reluctance by commercial banks to lower lending rates in response to the Central Bank's continuous rate cut since January 2009 displays their lack of confidence in the credit worthiness of the incoming credit demand and their own low risk appetite in lending given the uncertainty that prevails, according to industry analysts.
However Harris Premaratne, CEO Sampath Bank told The Sunday Times FT that there was no truth in saying that banks have curtailed lending. In fact banks want to lend to borrowers who are capable of servicing their advances, he said, adding that lending rates are on the decline.
A banking analyst said the non performing loan (NPL) ratio has also increased due to the lack of liquidity. The banks at the moment are keeping themselves out of danger by securing their cash in treasury bills (TBs) and treasury bonds, the analyst said, adding that the (loan) collection ratio in banks has reduced since October 2008.
Mr. Premaratne said that the banks have seen an increase in NPLs over the last four months, but from end March to April (up to Thursday), 'a little improvement' in this area was seen.
Some customers however said banks are selectively lending (only) to high networth clients.
Eran Wickramaratne, CEO NDB Bank said this suggestion is 'absurd'. " Of course all banks have their target customer segments depending on their lending appetite and business model. Banks must be rigorous in their credit assessment, thereby they protect both their borrowers and depositors," he said.
R. Theagarajah, CEO HNB also said that it is not correct to say that banks only lend selectively. "The idea is to look at quality lending and not marginal lending," he said.
Mr. Premaratne noted that with the declining TB interest rates, the lending rates are also on the decline. "The banks are gradually reducing their rates because of this and we have noticed the increase in loan advances," he said.
He added that as the interest rates decrease this trend will gather momentum and more customers will opt for such facilities. "With the war finishing, we need to allow a little more time and businessmen will see better sentiment for them to submit project proposals for businesses," he said.
The analyst noted that banks have 'drastically' reduced lending to finance firms, used vehicle importers and also property developers. Mr. Premaratne noted that as it is vehicle importers find it difficult to sell their vehicles and they do not open any more letters of credit to import vehicles as their yards are already full with vehicles they cannot sell. "As such they do not want to import - it is not that we do not want to lend to them," he explained. He said it is a similar scenario with re-possessed vehicles of leasing firms as well. "The seized vehicles which are to be sold are also substantial. So these firms are cautious to approach banks now," he said.