Central Bank keeping watch on excessive lending rates still prevalent in the market

By Sanath Nanayakkare

Interest rates play a pivotal role in the financial landscape, significantly impacting micro and small businesses as well as marginal borrowers. The Island Financial Review learned from sources familiar with small business loans that some banks charge as high as 20% of interest from small business owners and self-employed people for loan amounts below Rs. one million, given out for a period of 2-3 years.

“While this might seem like mere numbers, interest rates can profoundly impact a small business’s survival or the very endurance of own-account workers who are self-employed and face many challenges in the informal economy. The current AWPR favours the top-end customers of the banks, and the small-timers have not been provided with any relief in the low-interest rate environment. In other words, they are not able to raise funds at a rate lower than their expected return rate. This situation presents small businesses with a difficult dilemma. In this context, the Central Bank Governor’s recent comments on this matter have been widely welcomed by borrowers who fall into the marginal category,” they said.

These sources referred to the following comments made by the Central Bank Governor Dr. Nandalal Weerasinghe presiding over last week’s Central Bank Policy Agenda meeting for 2025.

Touching upon excessive interest rates still prevalent in the market, Dr. Weerasinghe said:

“The Central Bank observes some excessive, outlier rates of interest on facilities extended to Micro, Small and Medium Scale Enterprises (MSMEs) as well as marginal borrowers and certain credit products which are not consistent with the prevailing relaxed monetary policy stance. Moreover, risks associated with lending are on the decline while the credit appetite of banks and financial institutions is improving given the overall stability and recovery witnessed in the economy. Therefore, with a view to making low-interest rate credit accessible, the Central Bank will closely work with banks and other financial institutions to reduce the excessive interest rates still prevalent in the market which are not consistent with the prevailing relaxed monetary policy stance.”

Being deliberate in balancing the scale, the Governor said,” While low interest rates have helped revive credit and contributed to improving the overall business sentiment, they could also disproportionately hurt savers. However, unlike during the high inflation episode, real returns on deposits have been positive, with inflation successfully being reined into low levels. Interest rates have their cycles, and the Central Bank will manoeuvre interest rates to ensure that inflation is kept low and stable with a view to promoting overall public welfare.”