Central Bank applies breaks on highflying rates from finance companies

The Monetary Board of the Central Bank of Sri Lanka (Monetary Board) has issued a new direction titled ‘The Finance Companies (Interest) Direction No. 1 of 2008’ to the registered finance companies lowering the maximum interest rate that can be paid on term deposits by 0.5 percent and 1.0 percent based on the term to maturity of term deposits, and by 1.0 percent in respect of savings deposits. This new direction will come into force from 1st April 2008.

As per the new direction, the maximum annual rate of interest which may be paid by a finance company on a time deposit which carries a maturity period of 12 months or less, shall not exceed the weighted average yield applicable to 364-day Treasury Bills issued during the immediately preceding quarter, plus 2.5 percentage points. For the deposits which carry a maturity period of more than 12 months, the interest rate may not be more than 5 percentage points over the weighted average yield applicable to 364-day Treasury Bills issued during the immediately preceding quarter. The previous limits were 3 and 6 percentage points, respectively, above the relevant Treasury Bill yields.

The interest rate that can be paid on savings deposits has also been changed. The maximum annual rate of interest on any savings deposit should not exceed the weighted average yield applicable to 91-day Treasury Bills issued during the immediately preceding quarter, less 1 percentage point. Prior to the new Direction, the maximum rate was the weighted average yield applicable to 91-day Treasury Bills issued during the immediately preceding quarter.

All registered finance companies are required to comply with the Direction. The relevant weighted average yields applicable to Treasury Bills are sent to all registered finance companies by the Department of Supervision of Non-Bank Financial Institutions of the Central Bank of Sri Lanka at the end of each quarter to enable the finance companies to adjust the interest rates as required by the Direction.

The Central Bank expects that these revisions of the deposit interest rate ceilings would, in turn, lead to the reduction of the lending rates of finance companies.

The deposit interest rate ceilings imposed under the new Direction are shown below.
Deposit Category Interest Rate Ceiling (% per annum)
Time deposits, bond or other instruments
maturing in 12 months or less WAY on 364-day TB + 2.5%
Time deposits, bond or other instruments
maturing in more than 12 months WAY on 364-day TB + 5%
Savings deposits WAY on 91-day TB – 1%

* WAY = Weighted Average Yield TB = Government Treasury Bills