October 27, 2009 / 12:38 PM / 10 years ago

Sri Lanka's president orders state bank lending cuts

COLOMBO, Oct 27 (Reuters) - Sri Lanka’s president on Tuesday ordered state banks to slash lending rates by almost half, after repeated cuts by the central bank failed to bring down commercial lending rates, the president’s office said.

The decision by President Mahinda Rajapaksa in his capacity as finance minister takes effect from Wednesday. State banks have been charging 15-22 percent for commercial lending.

“President Mahinda Rajapaksa had ordered state banks to reduce lending rates in between 8-12 percent,” the president’s office said in a statement.

The central bank so far in 2009 has cut it repurchase rate by 250 basis points to 8 percent and reverse repurchase by 150 basis points to 10.5 percent, both near four-year lows. [ID:nCOL399979]

But banks have yet to bring down their commercial interest rates, which the central bank has said was hampering private-sector credit growth that has been a drag on overall corporate performance.

“This decision was aiming to encourage small and medium enterprises including agriculture, tourism, industries, fisheries, and construction,” the president’s statement said.

Analysts said the move may fuel inflation in the short term, which could undo progress made by the central bank in bringing inflation down to a record low this month from a record high of 28.2 percent in July 2008.

“The decision could increase demand for loans even for vehicles and other unnecessary items, which would reverse the inflation trend in the short term,” an analyst told Reuters on condition of anonymity.

Two bankers and an analyst Reuters spoke to on condition of anonymity said the decision appeared to have more to do with upcoming presidential and parliamentary elections than it did with sparking credit growth. [ID:nCOL504639]

The central bank’s rate cuts have helped to bring down treasury bill yields by over 7 percentage points to levels last seen in 2004. The benchmark 91-day T-bill yield is 9.10 percent. (Additional reporting by Ranga Sirilal; Editing by Bryson Hull)

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