Your Interest Income
Mawella K Prematilleke
July 28th, 2018
Income needs for living. That’s an Intrinsic part of our life. The interest comes as an extrinsic value for consumption, in other words one of the major factors of purchasing power of any one in the free world.
Interestingly, Interest, Capital factors are one of the axiomatic intuitive of life, going far back to the findings of Great Indian statesman and philosopher, Kautilya Chanakya (350-275 BCE). The chief Economic advisor to the King Chandragupta, the first ruler of Mauryan Indian Empire explained in his book Arthashastra (Economics) free market and justification on Interest factor
Unfortunately, Chanakya model was forced to ignored by introducing a model by a classical economist, Prof John Menard Keynes, a British born in 1883 at Cambridge oriented the Keynesian Economic Model, saying interest rate plays a major role as government can harmonize economic systems, generating full employment, rather influencing aggregate demand in macroeconomic environment. Thereafter neoclassical American Economist Irving Fisher (1867-1947) created model called Fisher effect, where he explained, the relationship between inflation and real & nominal interest rate. He said real interest rate equals nominal interest rate minus inflation rate.
interest income and interest expenses are playing dye hard effect to every economy. Monetary system is generating economic values. Savings, Investments or treasuries, bonds, public placements are some of them.
Funding and Lending
We know Banks apply the Hard Profit Theory, like ordinary informal uncertificated money lender. They lend 85%-90% of customer deposits back to customers again. They borrow money, calling deposits and lend money calling as Credit (Loans and Advances). It’s a process, to minimize risk, banks add safe net called security, placing borrower’s moveable/immovable asset or at least a promissory note avoid credit risk/collateral cover.
At the end, the depositor receives the minimum interest income payment and on the other hand usual borrower gets the highest charge for the loan (Debt) taken.
That is the simple truth we do not understand. It is the truth, that Bankers understand, not required to be understood by the others.
(The concealed truth is Bank rates are always low, to encourage savings to pool money in Mutual funds for investments like stocks, bonds or immovable assets. But pension funds invest large volumes in Developed Capital or Money markets. TPG Capital or Golden Sachs are some example in USA. But in Sri Lanka, EPF or ETF pension funds available, but stability and soundness of our investments are quite faded due to behavioral aspects of market players. Basically, pullers in the market traditionally uses pump & dump manipulations and scams. Which is a known fact. Therefore, unlike India our mutual funds still at toddlers’ level of existence)
Interest Income – Selected Banks
The following statistics * selected four (4) Prime Licensed Public Commercial Banks. Interest earned and paid for the period ending 31st March 2017/2018, as public disclosure of Quarterly audited published Financials (LKR,000) in compliance with requirements of the Companies Act No. 07 of 2007.
Commercial Bank 31/03/07 31/03/08 Growth
Upon the above discloses, can observe, that the four (4) Commercial Banks have collected 34,962 mio as net interest income ending 31st March 2018 (1Q) The Banks have earned 40 % income over Interest payments during the quarter.
The Central Bank of Sri Lanka (1) has released their statistics on Commercial Banks including State Banks earnings quoted in the first quarter of 2018. The interest income indicated as 259,309 and expenses as 166,444, earning net interest income of 92,865. The four (4) Commercial Banks collection were of 34,962 mio.
It is important to refer, the profitability of the four banks (Nation Trust Bank has come close as to the largest 4th bank in the island, but still Seylan Bank is holding a larger network of branches and in terms of total assets and turnover, the statistics remain unchanged)
The Banks have collected net interest income of 34,962mio over total profit of 13,200 mio during first quarter. It is 38% against the net interest income (Quarterly audited Financials ending 31st March 2017/2018)
Present Market Interest rates
Commercial Bank (2)
Offers 3.5% pa interest on normal savings account balances and for Rupee fixed Deposit 10.5% p.a. For lending the present interest rate for Personal loan (Unsecured, basically fixed income owners) fixed between 14.5-16.5%p. a
Hatton National Bank (3)
HNB accepts money to saving account or opening such account giving 3.5% p.a as interest and for term deposits an interest of 10.5% pa. The Bank entertains loans and overdrafts @15-17% p.a and personal loan have fixed on 14.25%-15% p.a on 5-7-year basis
Sampath Bank (4)
This bank also like other Banks offer interest based on perfect competition. The normal savings accounts carry 3.5%p a (introduced several slabs on the quantity of amount and carries different incentive interest called bonus) and Fixed Deposit Interest placed on 10.5%p.a. As far as lending concerned, this bank does
not reveal lending rates on secondary data collection, but its for sure the rates would be quite similar to other competitive Banks.
But it is surprised under the customer charter, issued by the Central Bank of Sri Lanka, the banks are liable to display all the details of their products to the Public. Probably Sampath Bank may comply this requirement on branch level.
Seylan Bank (5)
It is similar like others, on Savings deposits, they offer, 3.5%pa and exceptionally quotes 11.5%pa for term deposits over one year and enhancing to three years to 13%pa. Their lending rate for personal loans remain 14.5%pa for one year and extends to five years @15%pa. Loan on Housing placed on 13.75%pa for five years and over five (5) years, quoted 15.25%
Bank Rate
In the meantime, Central Bank of Sri Lanka, maintains Bank or policy rate @15% for commercial banking drawings for temporary liquidity arrangements under the Banking Act. The Policy Rate (6) explains the rate that the monetary authority (i.e. the Central bank) sets in order to influence the macroeconomic contributory factors of the main monetary variables in the economic system
Considering the prevailing market rates, the average lending in Sri Lanka, credit secured against immovable property ranging from 22%-30%pa (According to the renown international research web www.ceicdata.com/en), Although, the Banks have displayed a big picture of profit, their non-performing advances figure for 2018 have the sign of increase, the recorded average NPA has been indicated as 2.5% among Banking Industry in Sri Lanka. Finally, interest income and associated other soundness indicators, Banks earn return of 34% profit or collecting 22 billons for a single quarter. The big picture is an ordinary saver may get savings interest figure of just 3.5% per annum. These Banks claims have paid over 28, bio to the State as own Taxes for 2018 1Q apart from other duties imposed (recovered from customers).
Return on Assets/ Equity
It is useful to ascertain the rates prevailing countries like USA, India and few Asian countries for comparison. But needless to say, our Banking platforms are quite non-formalized due to many direct obstructions. One example is horrified Bond incredible torpedo explosion at the Central Bank of Sri Lanka. Lurid Political power and climate influencing natural market forces to behave, applying destructive and distorted of models to achieve market capitalization.
Starting from Nepal (7), the bank Rate prevails at 8% and industry ROA and ROE respectively standing at 2.5% to 28%. The Indian position as 9.5 (Ave 1978/2016), ROA/ROE as 0.51 and 15.10. In Bangladesh the Banks have reported Bank rate at 6% with ROA/ROE as 1.48 and 9.8.
When we compare the Most powerful state in the Planet second to China, USA lending rates standing at 1.69 at present. ROA/E at 1.52 and 13. In China Bank rate stands at 2.25% and ROA/E at 1.33 and 18.3 at 2016/17 stats.
(Source Annual Financial Reports of respective Banks -2017)
The ROA and ROE of Sri Lankan Banks are reportedly maintained equal with global rankings, in other words our quality of living and macroeconomic indicators with developed world are sitting with Sri Lankan norms. Sadly, we have in-born discrepancies, surely cannot accounted for reconcile. Our Policy rate among higher in countries in the third world.
Besides the ordinary savers collecting distorted interest income, it is quite unfortunate the state fiscal mechanism, not sparing even much wanted foreign currency Accounts. This regulation has given a sharp impact of all blogs in the society.
(This study concentrates on interest component, you could also could ponder the stability of these Banks upon sensitivity statistics published. The Bank Capital, Equity, Total assets and Liabilities in terms of ownership. The Book and the pen shows, banks running on customer deposits not from owners’ funds despite Basel Accord Regulations, setup and structured, minimum Capital adequacy ratios)
Conclusion
At the same time ever worsening economic indexes like Public debt, Exchange rate silently killing our consumption. Banks tied Corporates, small/medium, trading and fixed income earners in their debt trap. They earn large quantum of profit on advances like revolving credit, overdrafts, credit cards, personal credit or even overdue advances
Ordinary Savers are the painful receivers of interest in Sri Lanka as a result of financial rigging, manipulation, right offs. The Banking Supervision in this country, presently lodging at Eighth Avenue NY, scrutinizing doctored news scripts for NYTimes. At the end, to complain we find no stanch financial jurists but of swaggers. Finally, the present digressive, timid economic pattern to be incarcerated by a new visionary Leader and executor is on hold.
Notes
*These figures are based on Interest income of Banks, not accounted for Non-interest income source for study. The basic bank rates based on ordinary savings and primary lending rates of each bank were considered for research purposes and academic convenience
References
(1) www.cbsl.gov.lk/en/rates-and-indicators/policy-rates,www.cbsl.gov.lk/en/statistics/statistical-tables/financial-sector
(2) http://www.combank.net/newweb/en/investors
(3) www.hnb.net/about-the-bank/investor-relations/reports
(4) www.sampath.lk/en/investor-relations/financial-statements
(5) www.seylan.lk/sites/all/themes/seylan/images/pdf/financial_info/Seylan-Bank-PLC-Annual-Report-2017.pdf
(6) Policy Rate is the rate that the monetary authority (i.e. Reserve Bank/ central bank) sets in
order to influence the macroeconomic financial contributors of the monetary variables in
the Socio-economic system (e.g. consumer prices, exchange rate or credit expansion, Inflation,
Unemployment). The policy interest rate determines the levels of the rest of the interest rates
in the economy, since it is the price at mostly private banks-obtain money from the central
bank. These banks will then offer financial products to their clients at an interest rate that is
normally based on the policy rate (www.focus-economics.com/economic-indicator/policy-
interest-rate
(7) www.theglobaleconomy.com – Sri Lankan banks maintain 2 and 17.6 as RAA/E as of 2017 (8)
(8) www.ceicdata.com/en/indicator
Mawella K Prematilleke
