Reduction in interest rates will spur growth

By Surekha GALAGODA

The Central Bank has instructed all banks to reduce interest rates by end October. Accordingly interest rates on housing loans will be reduced to 14 percent per annum while the interest rates on credit card advances will be reduced to 24 percent per annum and the interest rates on other loans and advances to be adjusted downwards by around a further 1-2 percent per annum.

Since February 2009, the Central Bank (CB) has eased its monetary policy stance by reducing policy rates, ie the Repurchase rate and the Reverse Repurchase rate by 325 basis points and 300 basis points. In response, the market interest rates have come down.

The banks lending rates have also declined with a time lag, but are yet to show full downward adjustment. At the same time, the current macro economic performance and stability warrant a reduction in the risk premia added to lending rates, thus leading to the spread between lending rates and deposit rates of banks reducing further,said an official of the Central Bank.

According to Central Bank sources the reduction of interest rates on housing loans, as well as other loans and credit cards will help boost economic activity in the country.

Reduction of interest rates on housing loans will encourage and entice people to own their own home while the reduction of interest rates on other loans will support the SME sector as well as other businesses to expand their activities and thereby contribute to the growth of the economy.

The source also said that the reduction of interest rates on credit cards will encourage people to use plastic money to avoid the risk of carrying cash to be stolen.

The sensible use of credit cards is a must to get its benefits as it encourages people to spend unnecessarily.

A senior People's Bank official said that they have already taken measures to reduce the loans taken by the construction sector to 12 percent while interest rates on loans for agriculture, trade and housing too will be redued.

He said that the interest rate for housing loans upto Rs 500,000 is 12 percent while for loans above this limit will carry an interest rate of 13 percent.

He said that People's Bank charges an interest rate of 33 percent for credit cards while in the private sector it is 36 percent. The interest on credit cards too can be reduced and it will be done in the coming weeks after all the members of the Credit Card Association meet.

Bank of Ceylon sources said that when BOC takes the lead other banks and people follow suit and this is evident in the rural villages.

He said that initially the BOC started to reduce interest rates last year while the bank recently reduced rates further to encourage entrepreneurial commitment to the on-going growth momentum aimed to usher peace and prosperity to the entire nation.

Under the CB directive the bank has reduced rates for agriculture, fisheries, animal husbandry, SMEs and exports to 9.5 percent per annum for loans upto Rs two million while people engaged in the sectors of tourism and construction can obtain loans at 11 percent while trading, consumption and the services sector can get loans at 13.5 percent while the interest rates on loans for imports is 13.5 percent.

The source further said that the banks focus is on broad based economic development with a view to create social equity and work for developing the country's agriculture , dairy , fisheries , self employment and other SMEs.

Sampath bank sources said that as banks were progressively reducing the housing loan rates adjusting is no problem.

Expressing his views on the reduction of credit card interest rates, he said that in the credit card market the rates were high but the reduction of interest rates will have an impact on the revenue earned from credit cards.Saman kumara a customer welcomed the reduction of interest rates on housing loans and credit cards. He said that though he was planning to build a home for a long time he could never make it a reality as the rates were high.

He said that he also welcomes the reduction of interest rates on credit cards and it will help to expand the use of credit cards while reducing thefts.