Would stimulate SMEs, exports and other sectors:

Bouquets for interest rate reduction

by Shirajiv SIRIMANE

Chief Executive Officer/General Manager, People’s Bank, P.V. Pathirana	Chairman, Trincomalee Chamber of Commerce, Raja Ram

The decision taken by the Government to lower interest rates in the three State banks would help stimulate Small and Medium Enterprises (SMEs) exports and many other sectors and would also accelerate economic development, according to Chief Executive Officer/General Manager, People’s Bank, P.V. Pathirana. He said due to reduced interest rates on loans (between eight and 12 per cent), the cost of capital would be low, enticing entrepreneurs to take risks and re-invest.

He said the Government has successfully ended the war and is now fighting an economic war and this measure would assist in this direction. This will undoubtedly increase production”, he said.

Speaking to the Sunday Observer, he said attitudes, technique and capital are the three vital components for economic development.

“Investors can now think more positively and introduce new techniques. They would not have any fear of increasing production.”

Through this scheme, loans for the sectors of agriculture, development projects, micro-finance, retail and trade, fisheries, construction, co-operatives, property development, housing, tourism and hotels will see a reduction in interest rates from the current 19 per cent to between 12 and 14 per cent.

By reducing the rates of interest for loans in all these sectors, People’s Bank has given great relief to over five million of their customers. Through this initiative, the bank aims to make its fullest contribution towards the Government’s plan for economic development of the country while also strengthening and enhancing the standard of living of the public through the provision of such financial support.

He said President Mahinda Rajapaksa, who initiated this scheme, had given specific instructions to the three State banks to pay less emphasis on collateral.

“If the collateral is high, lower interest rates would not have any positive impact on the economy. Therefore, in future, we would look at the proposal and the customer’s integrity when awarding credit,” he added.

Commenting on the housing loan portfolio, Pathirana said they have received over 6,000 applications.

“We have now decided to disperse Rs. 6 billion immediately towards this sector,” he said.

The bank has also decided to extend this reduced loan scheme for credit that was given before this decision was made.

Meanwhile, former President of the Federation of Chambers of Commerce and Industry of Sri Lanka and Chairman Asian Developers, the Managing Company of the Colombo Hilton, said the move will be a boon to investors. “This will definitely stimulate the SME sector that was facing major problems due to the lack of start-up capital,” he added.

Chairman, Trincomalee Chamber of Commerce, Raja Ram said that this is a dream come true for the rural SME sector. “We have been lobbying for a loan scheme of this nature and now entrepreneurs could invest, especially in the North-East provinces,” he said.

Access to credit

Access to credit was the key factor that hampered entrepreneurship and created frustration and annoyance. If credit was available through some means, it was at a very high interest rate resulting in entrepreneurs not investing.

Many people had plans, aspirations and proposals, but could not realize these due to lack of credit. Whenever a new business commences, it generates employment opportunities, increases cash flow to the area and most importantly, a new taxpayer is born, providing extra revenue to the government by way of income tax.

Successive governments had received pleas, appeals and requests from entrepreneurs, chambers and the public to intervene. However, none gave this issue serious thought until President Mahinda Rajapaksa ordered the State bank machinery to lower interest rates to manageable levels. When starting capital is available at negotiable rates, it not only creates a new breed of entrepreneurs but also encourages existing ventures to re invest. As the President’s directive is also for the slashing of interest rates on loans taken earlier, debtors would now have to pay less, increasing their buying power.

The Government has also assured that this move would not in anyway cut deposit rates and people who were living on interest could continue to do so in the future.

This assurance was endorsed by the heads of the island’s State banks at a joint press conference held with the Minister of Finance on Friday.

National Savings Bank Chairman S. R. Artigala said the State banks would maintain a one per cent to four per cent difference between the lending and deposit rates. State banks pointed out that additional money would be pumped into the economy with the recent rate cut.

They emphasized that demand for credit schemes such as housing loans would increase and therefore the demand for building material would also go up, pumping in more money to the economy.

No change for savings accounts

Bank of Ceylon’s General Manager B. A. C. Fernando said interest rates that applied to loans taken earlier had also been lowered. “The interest rates payable for saving accounts will see no change whatsoever,” he said.

CEO, People’s Bank, P.V.Pathirana also endorsed this.

Minister of State Revenue and Finance Ranjith Siyambalapitiya said that private banks would be made to reduce their interest rates to be on par with State banks using Monetary Board regulations if they fail to reduce interest rates on their own.

Taking a cue from this development the Hatton National Bank has announced its decision to reduce interest rates in an effort to support the government in stimulating growth in the country.

The reduction in rates will be applicable for new loans and advances the Bank will grant in future and will be mainly focused on SME and growth sectors of the country.

High interest rates and inflation that prevailed in the recent past discouraged new investments and the banking sector witnessed a drop in loans and advances over the past 12 months.

The bank is of the opinion that the reduction in interest rates would increase demand for credit and stimulate growth in the economy.