Sri Lanka expecting bank margins to tighten: CB Governor
Profits are needed to build capital to buffer deposits."About a year ago the overall intermediation cost was as high as 10 percent, one of the highest in the world," Cabraal told the annual sessions of Sri Lanka's Institute of Certified Professional Managers.
"Now it is down to about 6.5 percent. But we believe there is even more space to tighten that further. If we see a level of around 5.0 percent in the next few months I think that would be the rate we would be looking at."
Structural
In countries with high reserve ratios - which is the portion of deposits that has to be kept in the central bank - margins can be be high, as the cost of holding non-interest bearing reserves is passed onto depositors or borrowers.
Sri Lanka's reserve ratio was lowered to 7.0 percent from 10.0 percent in a series of cuts from October 2008 to February 2009 as the banking system ran out of liquidity in a balance of payments crisis.
A government that gets printed money from a central bank uses high reserve ratios to try and block its effects on inflation, a phenomenon known as the 'reserve tax'.
"Now it is down to about 6.5 percent. But we believe there is even more space to tighten that further. If we see a level of around 5.0 percent in the next few months I think that would be the rate we would be looking at."
Structural
In countries with high reserve ratios - which is the portion of deposits that has to be kept in the central bank - margins can be be high, as the cost of holding non-interest bearing reserves is passed onto depositors or borrowers.
Sri Lanka's reserve ratio was lowered to 7.0 percent from 10.0 percent in a series of cuts from October 2008 to February 2009 as the banking system ran out of liquidity in a balance of payments crisis.
A government that gets printed money from a central bank uses high reserve ratios to try and block its effects on inflation, a phenomenon known as the 'reserve tax'.
But lower reserve ratios make the system efficient and allow banks to survive with smaller margins. Under a currency board regime, which Sri Lanka had before a central bank was started in 1950, reserves are typically about 2.0 percent.
