Although the Central Bank's monetary policies have changed, their impact on commercial bank lending rates is inadequate. The reduction in the reserve ratio on two occasions and the reduced yield on treasury bills were expected to reduce the lending rates of banks. While deposit rates have declined sharply and prime customers are able to secure loans at competitive rates, many borrowers still complain that they continue to pay high interest rates.
The average deposit rates of commercial banks have fallen to 12 per cent per year compared to 13 per cent a year ago. The National Savings Bank which paid 15 per cent for one year fixed deposit one year ago has reduced its interest rate to 12 per cent. On its ordinary savings deposits it pays only 10.8 per cent compared to 12 per cent one year ago. During last year the Average Weighted Deposit Rate of commercial banks has declined from 12.3 per cent to 11.2 per cent per year. These show clearly a decline in deposit rates.
Commercial Bank Prime Lending Rates have also declined drastically. For the week ending September l9, the Prime Lending Rate averaged 12.8 per cent. This is a very sharp fall from 19.2 per cent one year ago. Despite this sharp decline in the Average Prime Lending Rate most customers have to pay a much higher rate. It is said that banks still charge rates above 18 per cent for most customers. This is particularly so for the smaller customers and those without clout to bargain.
One of the fundamental reasons for this ratchet effect in interest rates is that the State Banks have not brought down lending rates to most of their customers. This is no doubt due to the high administrative costs of the two state banks. Consequently, and despite the actions of the Central Bank, the average lending rates of the two state banks remain quite high.
They have not dropped adequately in response to the increased liquidity and moral suasion of the Central Bank. The high interest rates of the two Banks enabled the private banks to also keep their rates higher than necessary. They are thereby reaping what economists call a "rent". The rent is a surplus over and above what they would charge under competitive conditions. The reason why they are able to derive this rent is due to the monopolistic role of the state banks.
It is true that less tight monetary policies take time to work themselves out. This is in contrast to the immediate impact which tight monetary policies have. Yet, what we witness in Sri Lanka is not merely a lag effect of the change in monetary policies but also an inability to bring down rates owing to the high administrative cost of funds of state banks.
What this implies is that the inefficiency of the state banks is passed on to the business community and in turn to consumers. This is a highly unsatisfactory situation given the need for more investible funds at lower rates of interest. But there appears to be very little which could be done through market forces so long as the two state banks have a large share of the market.
The importance of investment for economic growth is such that no effort should be spared to bring down the intermediation costs of banks. The margins between deposit rates and lending rates must be reasonable. Too high a margin is a heavy cost for the community to bear. If in the Sri Lankan context market forces cannot bring them down, should the Central Bank use other instruments at its command to effect a reduction of interest rates?
In its Annual Report 1997 the International Monetary Fund states that the IMF Board conducted its biennial review of the underlying principles and procedures of surveillance and in doing so it welcomed the increased focus on financial and banking sector issues, capital account developments, provision of information to the IMF, and the dissemination of data to the general public.
The report also mentioned that in a November 1996 review of the provision of information to the IMF by members, the board noted that the quality and integrity of data had a major bearing on the IMF's ability to conduct effective surveillance.
In an article in the London Financial Times, its editor, Robert Chote, states that certain moves by the IMF are expected in the matter of the dissemination of information by member countries. The article says, "Central banks in industrial and developing countries are likely to face growing pressure to publish details of their forward foreign exchange transactions, limiting their ability to massage official reserves figures."
The moves, states the writer, would be aimed at toughening the IMF's benchmarks for the quality of official economic and financial statistics. It is envisaged that countries which are at present "encouraged" to publish details of their net reserve positions would soon be required to do so in terms of the "special data dissemination standard" devised after the Mexican peso crisis in 1995, which is at present a voluntary scheme.
The writer refers to the recent Thai crisis and says that the Bank of Thailand "disguised the parlous state of its reserves by engaging in $23.4 billion of forward transactions according to its finance ministry. This meant, says the writer, that the published gross reserve figures overstated the size of the Central Bank's reserves.
Later, the IMF put pressure on the Thai authorities to reveal their forward position following agreement on the Funds's $16.7 billion rescue package. Chote says that the IMF would be keen to avoid the same problem arising again.
But says, Chote, it will be difficult for industrial countries to impose this transparency requirement on developing countries without accepting it themselves, when at present only very few countries publish net reserves data.
The writer points out that the Bank of England's gross reserves data, which are published by the Treasury, have long been virtually meaningless because of the way they are affected by forward transactions.
He quotes a leading central banker as saying, "The Bank of England has been massaging its reserves figures for 30 years. They just decide what they want the gross figures to show and adjust them accordingly". Referring to the special data dissemination standard, the writer says it is designed for countries with or seeking access to international capital markets. Forty two countries had signed up to the standard which sets targets for the coverage, frequency and timeliness of official statistics and "the degree to which politicians have preferential access to them".
The subscribers are shown, says the writer, on an internet bulletin board maintained by the IMF which gives details of the standards observed in particular countries and provides links to the official websites of the various statistical agencies.
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