Confidence factor among both the private and banking sectors has to be established to get lending to grow, a banker, speaking on the backdrop of the Central Bank of Sri Lanka (CBSL) cutting down on its overnight (o/n) reverse repo rate by 50 basis points (bps) to 9% on Friday to spur lending, said.
However the o/n repo rate, ie. the rate at which CBSL pays banks for parking their excess cash with it remained unchanged at 7.25%.
The fact that the o/n repo rate has remained unchanged is an indicator by CBSL that they don’t want deposit rates to come down, but only lending rates to fall, another source said.
Credit growth as at end June, year on year increased by 6%, which a banker said was peanuts, compared to the double digit growth in lending to the private sector that was experienced in the past.
Government has to be given more time for the market to repose confidence on it despite the fact that the war was over 15 months ago, the sources said.
With lack of confidence in the Government translating to lack of confidence in the economy or real economy, investments, other than in Government securities have not taken-off. Market liquidity which was in the Rs. 50 billion range on an o/n basis till recently has since come down to Rs. 25 billion due to the settlement of the Government’s various overseas commitments (not petroleum bills or defence), coupled with the market banking its excess liquidity in Government securities, rather than lending the same to the private sector.
With Friday’s rate cut, one source however expected one year Treasury (T) Bill yields in this week’s primary auction to come down steeply to 7.75%, as opposed to 8.18% fetched in last week’s auction. T Bills are one form of Government securities.
2011 maturing T Bills were in any case trading at 7.50% in the secondary market prior to the auction, they said.
However, T Bonds in secondary market trading on Friday saw yields reduce by a mere 10 bps (compared with the steep 50 bps cut on the o/n repo rate announced by CBSL on that day), to be trading at 8.40%, 9%, 9.10% and 9.40% vis-à-vis 2013, 2014, 2015 and 2016 maturities respectively, over that fetched on Thursday.
The market had envisaged such a cut, so they had discounted it in prior tradings, they said.
The previous week’s T Bond primary auction saw weighted average yields fetching 9.40% and 9.55% for Bonds maturing on 2015 and 2016 respectively, a come down since in secondary market trading.
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