Central Bank – The Island

By Sanath Nanayakkare

With soaring key interest rates, rupee liquidity in banks is different from what is normal, Yvette Fernando, Deputy Governor of the Central Bank, said in a webinar organized by the Center for Banking Studies. of the Central Bank.

“According to the reports we have received, the current rupee liquidity in the banks has not caused any distress to their day-to-day transactions. However, in a rising rate environment, customers sometimes switch banks to obtain higher rates. and some even choose to use their deposits to buy treasury bills which earn them higher returns. This is normal when there is a big change in interest rates. You know banks accept deposits customers and invest these funds in a variety of ways to help the economy grow, while keeping depositors safe and rewarded.However, when such significant changes are made to the exchange rate policy and interest rates interest, banks feel the impact of these political decisions on their investment decisions.

She made the remarks in response to a question from the audience about whether the lifting of the fixed exchange rate regime and the mind-blowing interest rate figures could destabilize the banking system.

Elaborating on this particular public concern, she said: “Even before the last interest rate hike and flexible exchange rate policy, banks experienced strains due to lack of foreign exchange over the past 12 to last 18 months. Their foreign remittance base shrank and their foreign inflows plummeted after Sri Lanka’s credit ratings were downgraded by international rating agencies. Under such circumstances, banks had to make loan repayments. New loans could not be taken out and existing loans could not be renewed. Some banks were hampered in interbank settlements because their foreign entries were insufficient. The Bank of Ceylon and the People’s Bank, which provide substantial funds to finance the importation of fuel, propane gas, medicines and other essentials, have also felt a significant impact as a result of these developments. This situation led the two state banks to collaborate with other banks to facilitate critical shipments where the Central Bank also intervened when needed.

“Today, the latest interest rate hike and exchange rate policy have had an even more significant impact on banks’ assets and liabilities. However, banks’ capital and liquidity buffers are at optimal levels and have helped them operate resiliently despite the impact on their rupee liquidity.

The Deputy Governor went on to say that if the need arises to support the banking system with rupee liquidity, the Central Bank can do so within the regulatory provisions made available to it.

“We have the capacity to step in and provide this facilitation within this legal framework. We are always ready to do so. Even the Central Bank’s Monetary Council is aware of this situation,” she said.

“We recently allowed banks to operate in a new space of facilitated prudential requirements based on their assets and liabilities. I believe that in the short term, the adjustments to the macroeconomic framework and the measures taken by the government and the central bank will make it possible to strengthen the foreign exchange reserves and considerably mitigate these inconveniences. Thus, the banks will be able to operate as under normal conditions. It will take about a month or two to materialize. Of course, to achieve this, confidence in the Sri Lankan economy must be restored. A program with the IMF will help restore this confidence which, in turn, should revive the foreign exchange market, creating a more comfortable situation for banks,” she said.

Meanwhile, Prime Minister Ranil Wickramasinghe said on Tuesday that Sri Lanka had no rupee revenue and that by the end of the year the rupee crisis would be resolved with the introduction of taxes.

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