COLOMBO (EconomyNext) - A large 'casino-related' project has been asked to tap Sri Lanka's bond markets instead of relying on more bank financing, Central Bank Governor Arjuna Mahendran said.
He said a bank had requested for its single borrower limit to be lifted so that it could fund such a resort.
"So I said no," Mahendran told a business forum in Colombo organized by Fitch Ratings. "It is ridiculous, we have a bond market here.
"We have blue chip companies who are going to banks for their funding needs when there is a bond market and they can easily tap these markets for their liquidity.
"So I think there is a big education process ahead for us on the benefits of funding from the markets. Obviously it is cheaper, it is more reliable and you know it creates liquidity. Obviously some of our corporate titans have not learned the lessons yet."
Commercial Bank Chairman Dharma Dheerasinghe said his bank was lending to prime customers at rates as low as 6.5 percent.
Analysts say it is not clear whether projects that borrow at such rates would be viable when interest rates eventually normalize with bad fiscal policy (Sri Lanka in danger of travelling the PIGS path with low nominal interest rates).
Sri Lanka's market interest rates are at a historic low, with Treasuries going at yields not seen since the 1970s.
Sri Lanka's banking system is recovering from a balance of payments crisis triggered by bank financed energy subsidies which were ultimately accommodated by Central Bank credit in 2012 delaying a required interest rate rise.
Corrective measures in 2012 left the currency depreciated from 110 to 130 to the delay, decimating domestic purchasing power, eventually leading to the ouster of the last regime while high rates forced firms to de-leverage and there was also mass-default of gold-backed loans.
But private credit demand had started to pick up from August 2014 as the cycle progressed.
But due to a policy error in failing to sterilizing excess liquidity effectively, Sri Lanka's rupee has come under pressure again the forex reserves are under pressure, partly due to IMF repayments as warned by analysts. (Sri Lanka may lose forex reserve beauty contest amid ultra-low interest rates)
Sri Lanka's current interest rates are considered to be unsustainable by many analysts especially after a revised budget raised state sector salaries, cut fuel prices and delayed a 1.5 billion US dollar bond issue scheduled for January.
There has also been a boom in listed corporate bonds, largely because they are tax free, which itself raises the danger that people may buy the bonds without paying proper regard to the credit risk.
But many of the bonds, especially those with higher ratings, have been bought by banks.
Head of Sri Lanka's Fitch Ratings Maninda Wickramasinghe warned that there was a danger of credit being mis-priced if risks were not properly communicated to market participants.
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