Risk Cap

Mar 28, 2008 (LBO) – Sri Lanka's central bank has limited the risk premium of one year deposit rates of finance companies to 2.5 percent above Treasury bills, from an existing rate of 3.0 percent, the regulator said. The benchmark rate applicable is the weighted average T-bill rate of the preceding quarter.

In 2005 the central bank had issued a direction limiting the premium over the risk free rate to 3.0 percent and deposits over 12 months to 6.0 percent. The risk premium for savings deposits had been capped at zero.

The new direction effective from April 01, caps the savings rates at a negative 1.0 percent and 5.0 percent for deposits over 12 months.

"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 regulator said.

The risk caps come at a time when risks in the financial system appear to be increasing with several finance companies being downgraded or their outlooks being lowered.

Industry officials say riskier smaller finance companies in particular have been finding it difficult to raise funds in competition with larger entities amid rising Treasury bill rates.