Banks Make Killing On Credit Cards

Banks are making a killing on credit card lending, where the interest charged may be as high as 40%, whilst interest paid on deposits being marginal in comparison.

With commercial banks offering savers interest rates varying from between a mere 1.50-12.50% on their deposits, according to Central Bank of Sri Lanka’s (C.B.S.L.’s) latest data compilation which was for November, a two month lag period in data dissemination, those translate to an interest rate gain for banks on credit card lending vis-à-vis savings deposit rates, of between 38.50% and 27.50%.

Savings deposits are considered a cheap source of funding for banks, which in turn lend those to borrowers at a margin.

With annual average change in inflation reported at 3.4% last year according to C.B.S.L., real rate of return on savings interest for savers after deducting for inflation translates to a range varying from a negative return of 1.9% to a positive 9.10% return at the higher end of interest payable to savers on their bank deposits.

State owned National Savings Bank was offering savers an interest rate of 5%, equivalent to giving them a real rate of return of  a mere 1.6% after deducting  for inflation.

Some banks, in addition to the interest offered on their savings product range, were also luring customers by giving them discounted purchases at selected retail outlets as well as gift vouchers for their savings accounts, while others were offering bonus interest on interest payable on savings, depending on the savings balance, on the basis that higher the savings balance, higher the bonus interest payable.

According to C.B.S.L., commercial banks’ average weighted prime lending rate (a.w.p.l.r.), i.e. the interest rate charged on good borrowers, generally blue chip companies, was 10.91% in the week ended January 22, translating to a profit of 9.41% on the interest rate gain on the lower savings deposit rate and a negative 1.59% gain on the higher 12.50% savings interest payable to depositors.

A.w.p.l.r. is the lending rate charged by banks to their top customers, i.e. those customers whose chances of loan default are deemed to be minimal or low risk, hence the interest charged on such loans being low, compared to the interest charged on borrowings made by other bank debtors.

Banks operate on the basis, lower the risk of default, lower the lending or borrowing rate, but higher the risk, higher the lending rate.

Another source of cheap funding for banks is current accounts which carry no interest payment liability on banks at all. Current accounts in fact are “no interest cost funds” for banks.

Meanwhile banks’ liabilities on one year’s fixed deposit accounts ranged from between a mere 7.25%-19% (at the upper end) in November, according to C.D.S.L. data.

4 Comments for “Banks Make Killing On Credit Cards”

  1. Buddhasiri

    What else can you expect from parasites who live on the sweat of others? The blood money they consume is surely bound to destroy them. So let them voraciously devour the unjust income and inflict upon themselves the curse of the nation. Poli Ralahami’s with a retinue of letters behind their names, slaughtering the innocent citizenry mercilessly and in great style.

    These rascals have the gall to teach the nation Social Responsibility when they themselves reek of moral irresponsibility. We saw, just very recently someone who was supposedly an invincible icon, crumble before our very eyes with a massive thud. I don’t have to provide any further detail of this saga. Do take heed bankers and others in the trade. Ignite your sense of fair play and equity. There is a much bigger, very much bigger force in operation that commands from you justice and not avarice.

    Ironically not a scoundrel is bothered to intervene and arrest this rip off or should I say carnage. By scoundrels I am referring to our 120 caring and deserved ministers whose love for the people is all embracing. Sorry guys, we are screwed from all fronts. These are extremely dangerous times to have a card. As for me I am getting back to the simpler and live according to your means and settle on date life.

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