Banks escape penalties with late rally

– Sampath, DFCC meet CBSL rate target

Sampath Bank PLC and DFCC Bank PLC managed to avoid Central Bank (CBSL) penalties with a remarkable reduction of their Average Weighted Prime Lending Rates (AWPRs) in the final week of the 27 December deadline.
This is noteworthy as the CBSL recently named these two banks, along with People’s Bank, as being likely to face penalties based on their weekly AWPRs as at 20 December.
While People’s Bank failed to lower its AWPR by 250 bps by the deadline as predicted, Sampath and DFCC lowered theirs by 99 basis points and 65 basis points, respectively, surpassing the 250 bps target.
On the other hand, Commercial Bank, which had not been flagged by CBSL on the 20th as its AWPR stood at 9.84%, has in fact ended up below the target. While it was required to reduce its AWPR by only 26 bps in the last week, its AWPR rose by 3 bps to 9.87%, resulting in a final deficit of 29 bps. Its AWPR was calculated at 12.07% on 26 April.
In sharp contrast, Sampath Bank lowered its AWPR from 10.43% to 9.44% within these seven days. Compared to its lending rate on 26 April this year of 12.95%, Sampath Bank had reduced its AWPR by 251 basis points by 27 December.
Speaking to The Sunday Morning Business, Sampath Bank Managing Director Nanda Fernando reiterated that it has fully complied with the CBSL requirement.
“Responding to the call of the Central Bank, Sampath Bank reduced the interest rate by 2.5% from the 26 April figure. The Central Bank has acknowledged that we have conformed to its requirements. We are conscious of our duty to provide low-cost financing to our customers as we want to play our part in economic growth as a responsible national bank.”
DFCC, the other big bank that was flagged by the CBSL, managed to lower its AWPR by 11.9% to 11.25% in the final week. Compared to its AWPR on 26 April, as of 27 December, DFCC had reduced its AWPR by 259 basis points from 13.84%.
It announced its compliance with the CBSL directive on lending rates as of 27 December 2019 last week through a press release.
“In keeping with the good governance we practice, DFCC Bank has honoured the directive given by CBSL and is fully compliant with the reduction of the weekly Average Weighted Prime Lending Rate (AWPR) by 150 basis points (bps) by 1 November and 250 basis points by 27 December compared to the AWPR as at 26 April 2019,” DFCC Bank CEO Lakshman Silva said.

The requirement

The AWPR reductions were mandated by an order issued in September requiring every licensed commercial bank to reduce their AWPRs by at least 250 basis points by 27 December 2019, compared to their AWPRs as at 26 April 2019.
The weekly AWPR is the weighted average rate of interest rates applicable on short-term loans and advances granted by commercial banks to their prime customers during a particular week.
As at 27 December, eight banks were yet to meet the AWPR reduction target, in addition to Commercial Bank PLC.
The most prominent among them is state-owned People’s Bank, which has fallen short by 16 basis points from the required 250 bps reduction. People’s Bank’s AWPR on 26 April was 12.49% and it came down by 234 basis points to 10.15% on 27 December. From 20 December to 27 December, People’s Bank’s AWPR reduced by 35 points.
Other banks that failed to comply are Indian Overseas Bank, MCB Bank Ltd., Public Bank Berhad, Standard Chartered Bank, Amana Bank PLC, and Axis Bank Ltd. by a shortfall of 154 basis points, 231 basis points, 87 basis points, 173 basis points, 221 basis points, and 166 basis points, respectively.
Bank of Ceylon complied with the requirement with a basis point reduction of 264 to 10.24% as of 27 December, compared to 12.88% on 26 April. Hatton National Bank reduced its lending rates by 259 basis points to 9.68% on 27 December from 12.27% on 26 April.
Seylan Bank reduced its lending rate as of 27 December to 10.44%, compared to 14.22% on 26 April as it was reduced by 378 basis points. Amongst the banks that complied with the requirement, Union Bank of Colombo had made a significant reduction in their lending rate by reducing 596 basis points, more than double the requirement. Their lending rate on 27 December was 10.72% compared 16.68% on 26 April.
Pan Asian Bank reduced their lending rate by 259 basis points to 12.9% on 27 December from 15.49%. National Development Bank reduced their rate by 258 basis points to 10.25% from 12.83% on 26 April. HSBC reduced their lending rate by 100 basis points to 8.84% from 9.84% on 26 April while Nations Trust Bank reduced by 256 basis points to 9.89% from 12.45% in the last week of April.
On 24 September 2019, the CBSL ordered licensed commercial banks (LCBs) to reduce the weekly AWPR by 150 basis points by 1 November and by at least 250 basis points by 27 December, compared to the AWPR as at 26 April 2019.
This cap was mainly imposed to increase private sector credit growth as the Year-on-Year (YoY) growth of credit disbursed to the private sector by LCBs during the first seven months of 2019 grew slower than the corresponding period last year.


“From next week onwards, we will start imposing certain penalties or sanctions. Otherwise, it is unfair on the banks that have complied,” noted CBSL Senior Deputy Governor Dr. P. Nandalal Weerasinghe, addressing the press briefing of the eighth and final Monetary Policy Review of 2019 on 27 December 2019.
However, he added that the exact penalties and sanctions these banks would suffer had not been determined yet.
“We will have to discuss with the Monetary Board first. There are several provisions in the Banking Act, so we have to decide on the basis of the extent of deviation and other factors. After we see the figures, we will decide what kind of actions those would trigger on individual banks.”
He added that while there were smaller banks such as Axis Bank Ltd., Public Bank Sri Lanka, and Cargills Bank Ltd., which had also failed to comply with the directive, the main impact on private sector credit growth was from the noncompliance of bigger banks.
In November, The Sunday Morning Business exclusively reported that the banking industry had largely fallen in line with the CBSL lending rate caps, with six banks having even reached the rates specified for December at the time.
Meanwhile, the weekly AWPR came under 11% for the first time in more than a year in July 2019. The prime lending rate is the interest rate charged by Sri Lanka’s banks from their largest, most secure, and most creditworthy customers on short-term loans. This rate is used as a guide for computing interest rates for other borrowers. The weekly AWPR is the average prime lending rate among banks in a particular week.
A lower rate means more access to finance for businesses and entrepreneurs, enabling greater economic activity and growth. A week into the Easter Sunday incident, the AWPR went up to 12.24% from 11.99%, while during the political turmoil, which erupted on 26 October 2018 and lasted 51 days, the lowest AWPLR was 11.81% while the highest was 12.28%.