The Central Bank yesterday announced that it is limiting the penal interest rates charged by the country's financial institutions.
In a statement the Bank expressed concern over the excessively high current penal interest rates charged by banks, finance companies and leasing companies while low interest rates are prevailing in the country.
The Bank said such rates are an undue burden to overdue borrowers and hinders entrepreneurship development in the country.
"The inability of borrowers to service their loans in the light of such high interest rates also has an adverse impact on the financial position of banks, finance companies and leasing companies, as well as financial system stability.
A Central Bank survey has revealed that the current penal interest rates charged by banks are in the range of 2 - 20 percent a year on the amount in arrears and sometimes on the total amount outstanding, over and above the original interest rates charged on the loan.
The comparative rates charged by the finance and leasing companies are even higher, the Central Bank said noting that leasing facilities charge 36-48 percent a year on overdue rentals over and above the original rates.
Compared to the lending rates of 4-12 percent per year in other peer emerging economies, Sri Lanka's excessive interest rates are not consistent with the present low interest rate regime prevailing in the country, the Central Bank observed.
The Bank has therefore capped the penal rates of interest charged on all loans and advances, including credit facilities by the banks at 2 percent per year while the cap was set at 3 percent per year for finance companies and leasing companies.
The new rates will go into effect from August 1st.
"In addition to strengthening financial system stability, the new measures are expected to expand the economic activities of the country in line with the macroeconomic projections for the medium to long term, through the enhancement of lending operations of banks, finance companies and leasing companies in a prudent and productive manner," the Central Bank said.