Central Bank places ceiling on penal interest rates

Central Bank (CB) officials said that penal interest rates charged by banks, finance companies and leasing companies are excessively high, and that such rates are an undue burden to overdue borrowers while also hindering entrepreneurship development in the country.

The inability of borrowers to service their loans in the light of such high interest rates has an adverse impact on the financial position of banks, finance companies and leasing companies and financial system stability.

A Central Bank survey has revealed that the current penal interest rates charged by banks are in the range of 2 percent to 20 percent per annum on the amount in arrears and sometimes on the total amount outstanding, over and above the original interest rates charged on the loan.

In the case of finance companies and leasing companies, the comparative rates are even higher. In respect of leasing facilities, penal rates charged by banks, finance companies and leasing companies are in the range of 36 percent to 48 percent per annum on overdue rentals over and above the original rates.

It is therefore clear that such excessive interest rates are not consistent with the present low interest rate regime prevailing in the country, and the low interest rates prevailing in other peer emerging economies where the lending rates only range from 4-12 percent per annum, and the penal interest rates charged are also comparatively much lower.

Central Bank officials have called upon banks to reduce the penal rates of interest charged on all loans and advances, including credit facilities already granted, to a level not exceeding 2 percent per annum, while the finance companies and leasing companies have been called upon to reduce the penal rate of interest to 3 percent per annum from August 1.

In addition to strengthening financial system stability, these measures are expected to expand the economic activities of the country in line with the macroeconomic projections for the medium to long term, through the enhancement of lending operations of banks, finance companies and leasing companies in a prudent and productive manner.