CB urges banks to boost lending activities

In view of the sharp decline in inflation and inflation expectations, the Central Bank has commenced relaxing its monetary policy stance and has taken several measures to enhance liquidity in the market.

The penal rate of interest imposed on reverse repurchase transactions with the Central Bank was reduced gradually from its initial rate of 19 per cent to 14.75 per cent.

In addition, the Repurchase and Reverse Repurchase rates of the Central Bank have also been reduced by 25 basis points each to 10.25 per cent and 11.75 per cent, respectively, and the Statutory Reserve Ratio (SRR) applicable to rupee deposit liabilities of commercial banks has been reduced by a total of 300 basis points to 7 per cent, by January 2009 in order to inject fresh liquidity to the market.

Further, liquidity shortfalls which the commercial banks face at any time are being addressed by releasing liquidity through open market operations conducted by the Central Bank on daily, term and permanent bases.

The careful relaxation of the Bank’s monetary policy stance through the above policy measures has resulted in the downward revision in call market, Treasury bill and bond rates.

The average call market rate currently is around 12 per cent compared to 17-19 per cent that prevailed prior to the relaxation of monetary policy and yield rates on Treasury bills and bonds have declined in a range of 170 - 240 basis points since end 2008.

The above measures are intended to have a significant impact on all interest rates in the country so that growth in private sector credit is maintained at a desirable rate which is compatible with the medium term growth and inflation path.

However, the Central Bank notices with concern, that commercial banks have not yet responded sufficiently to the easing of the monetary policy stance of the Central Bank and that notwithstanding the relaxation, the rate of growth in credit to the private sector has declined sharply to 6.4 per cent in January 2009 from 7.9 per cent at end 2008.

Accordingly, the Central Bank has requested commercial banks to enhance lending activities immediately so that the credit flow to the private sector is ensured and economic activities in the country are supported, thereby arresting any adverse consequences on the economy.