Sri Lanka deposit rate ceiling to fall in April

COLOMBO, March 28 (Reuters) - Sri Lanka’s central bank said on Friday it was lowering the ceiling on deposit rates offered by finance companies to curb lending rates effective next month.

The maximum rate on a time deposit with a maturity period of 12 months or less will be the maximum rate of 364-day Treasury Bills issued during the immediately preceding quarter, plus 2.5 percent.

For deposits with a maturity period of more than 12 months the maximum return will be 5 percent plus 364-day T-Bills.

The previous limits were 3 and 6 percentage points, respectively, above the relevant T-Bill yields.

“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 central bank said in a statement.

Finance companies in Sri Lanka offer returns on deposits high as 25 percent, higher than commercial banks. The market interest rate hovers around 18 percent.

Their borrowing cost are higher than banks, sometimes over 35 percent, but investors still go to finance companies for reduced bottlenecks and minimum due diligence.

Analysts see the central bank move as designed to spur economic growth which threatens to fall below target due to war, high inflation and soaring interest rates.

“The central bank is trying to promote credit, then (finance companies) they could lend at a cheaper rate,” said Chirantha Caldera, a currency dealer at Commercial Bank of Ceylon.

“The central bank is focusing to target the growth by reducing leasing rates, consumer financing rate, and construction loan rates to promote consumerism.”

Sri Lanka’s economic growth weakened to 6.8 percent in 2007 from 7.7 percent in 2006, a lower than expected 7.5 percent by the central bank.

Economist say the the country faces many challenges to sustain over 6 percent growth in 2008, with a deteriorating security situation, high interest rates, and recession in the United States.

The civil war between the government and Tamil Tiger rebels, which killed more than 70,000 people, has intensified since the latter part of 2006, and has become more expensive for the state.

Annual inflation measured on a 12-month moving average hit an 18-year high of 18.1 percent in February, up from 17.6 percent in January.

The benchmark 91-day treasury bill rate, which is used by banks to determine their own lending rates, is currently hovering around 18.5 percent and 364 day rates at 18.99 percent. ($1=107.845 Sri Lankan rupees)

Editing by Gerrard Raven