Business Times

Interest rates cut good for banks in the long term

Continuous pressure on commercial banks by the Central Bank to cut interest rates will reap benefits for them in the long term, according to banking industry analysts. “Initially (for the first and second quarters of next year) the interest spreads (profits)will come under pressure, but in the medium term the lower spreads will be compensated with high volume/loan growth and possibly less defaults,” an analyst said.

He noted that banks would prefer a slightly lower interest margin given that their loan book will grow in size and quality over a period of time. Yadhavan Jeyaram, Manager Sales Bartleet Stockbrokers said that the benefits of reducing interest rates are expected to fall in the New Year as banks will expand their credit portfolios while investors will borrow money to invest in high returned alternatives like the stock market.

The Central Bank recently relaxed its monetary policy stance (since the start of 2009) with the anticipation of more credit flow in to the economy. Two months ago a directive was called by the government in slashing the rates of state banks. “Private commercial banks that have reacted may have an effect on their financials. However their immediate quarter will be less sensitive to this factor,” Jaliya Wijeratne, Director Institutional Sales SMB Securities said. He said that the first and second quarters of this year will see some reduction in profits but thereafter they are slated to post profits.

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