T-Bill dealers make a killing while bank depositors earn a pittance

by Sanath Nanyakkare

Primary dealers, including banks and other financial institutions that lend to the government through lending instruments, such as short-term Treasury Bills, stand to make a surplus profit of about 5.70% which is one of the highest in the history of Sri Lanka, The Island learns.

Surplus profit is made when these primary dealers profit from the prevailing interest pricing errors in the bank deposit rates and in the government securities market.

They invest in more liquid Treasury Bills which bring them an interest rate of 12.92% in just three months whereas an ordinary bank depositor earns an interest between 10-12% per annum.

This indicates a distortion in the money saving market especially against an inflation rate of 18%, analysts say.

Moreover, for the first time after more than five years, CBSL rejected all bids received at T-bond auction held on 29th March 2022 because higher interest rates were expected by market participants to compensate for galloping inflation and higher financing requirement of the government which normal depositors can never do.

Thus undersubscribed bill and bond auctions have increased Central Bank holdings of government securities to Rs. 1.7 trillion, data from the Public Debt Department reveals.

Sri Lanka recorded one of its highest inflation of 18.7% in March 2022 relative to 15.1% in February 2022 causing an alarm among the consumers in the country. Going forward, inflation is expected to remain high due to higher commodity prices and energy costs.

“Although lending rates have adjusted upwards, the adjustment in bank deposit interest rates remains sluggish, which has been inadequate to attract deposits into the banking system,” they said.

“The new Finance Minister will have to further hike interest rates at the next Monetary Policy Meeting to encourage banks and financial institutions to make the required adjustments to deposit rates in order to promote savings and to be fair by ordinary depositors,” they said.