Sri Lankan banks which took little interest towards deposits when interest rates were going up appear to have suddenly woken up to aggressively cut rates on such deposits when the rates are on their way down, leaving the hapless savers devastated from still red-hot prices in the economy.
Banks have disproportionately cut their deposit rates since the announcement of 250 basis points cut in the policy rates earlier this month by the Central Bank, which signalled an ending to the tightening cycle.
However, savers were caught off guard when they were told by their banks that the rates offered for their deposits had been slashed by as much as by 600 to 800 basis points upon their renewals or for new deposits in less than 24 hours since the policy rates were brought down on June 1.
For instance, banks which have been offering up to 18 to 19 percent for the most popular one-year term deposits are now quoting 12 percent.
But the prime rate, the rate at which banks loan to their most prime and rated customers for short periods such as three months is going at 19.69 percent while the rate for others still hover at well over 20 percent.
Banks have always been playing this game when the policy interest rates in the economy move in either direction, solely to fatten their margins and thereby to make a windfall. Interest margin is what banks make from what they charge on their loans and what they pay for deposits.
Banks take longer to raise what they offer for their depositors in a tightening cycle but are quicker to cut rates when they see even a specter of an easing mode by the Central Bank. They do the opposite for lending rates in these cycles to make the most money during this interim period until the rates settle.
But this time the banks appear to have become more ruthless as seen from the extent to which they have cut deposit rates in the shortest time compared to the cut in key rates as opposed to the reduction in lending rates to make the most amount of money even without extending fresh credit.
The process which is known as re-pricing assets and liabilities is a common practice to reflect the risk and the appetite for liquidity in the system.
But the process has left savers devastated as they see their deposit incomes crater while the prices of goods and services they consume still remain at exponential levels despite the sharp deceleration in inflation rate due to base effects.
Sri Lanka lacks market oversight and anti-trust authorities to police and take action against unfair trade practices.
source daily mirror
