Top analysts and economists last week said that the recent decision by the Central Bank of Sri Lanka (CBSL) to raise the Statutory Reserve Ratio (SRR) will result in intended consequences stifling credit growth despite claims otherwise.

A former governor of the CBSL on Monday (4) in a daily had claimed that the SRR was a ‘dead duck’ stating that it was a tried, tested and failed system which was abandoned by the Central Bank years ago.

However, analysts pointed out that it was a positive step towards slowing down credit and increase the reserves of the Central Bank of Sri Lanka (CBSL). They however added that the banking sector is to see a hit as their lending ability would be curtailed.

The CBSL in its Monetary Policy Review for December had increased the SRR by 1.5% from 6% with effect from January 16.

Professor in Economics at the University of Colombo, Dr. Sirimal Abeyratne said that this method was a conventional system and added that its effectiveness depended on the country’s economic environment. “Right now we are in a situation where there is inflationary pressure and so on. Therefore, to control that the Central Bank would have decided to increase the SRR,” he said. Experts also pointed out that the CBSL needed to have a proper strategy to sustain this since Sri Lanka continued to hold on to interest rates.

Dr. Abeyratne stated that since the SRR system was conventional, it could be used depending on the necessity. “Several countries have adopted this method and that had worked. But as I said, it all depends on the economic environment that the country is facing at that time,” he added.

Meanwhile, CEO, Hatton National Bank PLC, Jonathan Alles said that the move would have an impact on the lending ability of the banks while also increasing the lending rates. “As of now, these are the ways in which the banks would be affected. However, whether this move would be positive or otherwise will be something that we will have to wait and watch,” Alles told the Nation.

CEO, People’s Bank, N. Vasanthakumar also told the Nation that the liquidity of banks would decrease due to this move.