Two months ago, we released a consultation paper on floating interest rates and discussed it with the market community. The findings of this discussion are as follows. It would be unreasonable to prohibit floating interest rates completely since this reduces opportunities to expand lending, especially given that banks have increasingly more current liabilities and increasingly more non-current assets. Floating interest rates really help address this mismatch. Nonetheless, I would like to emphasise that in the first place banks still need to expand the share of long-term funding, for instance, through bonds. However, unrestricted access to floating interest rates should only be provided to ‘qualified’ borrowers, that is, the highest-income people who are well aware of inherent risks they accept taking out very large loans. In contrast, small loans should be issued on very clear terms, and floating interest rates in this case should be prohibited, in our opinion. Floating interest rates should be available in the absolute majority of loan types (including in mortgage lending). However, the range of possible changes in floating interest rates or loan maturities should be limited. Let’s say that this should be no more than a third of an interest rate or no more than a fourth of a loan maturity. We still need to discuss these parameters in greater detail. People would thus be able to measure their risks under various scenarios and make a wellinformed decision. We believe that the caps setting the maximum amount of a small loan should be established taking into account regional specifics.

Similarly, the Central Bank cannot reasonably be held responsible for institutions and persons engaged in banking, finance and leasing businesses without authority. Such unauthorized institutions attract investments by offering unusual products. The persons associated with such institutions are usually preying on greed, bypassing many licensed institutions in the country. They oppose the Central Bank when they are investigated, but they start blaming the Central Bank when they start failing. The Central Bank has traditionally strived away from intervening such failed unauthorized institutions. However, in response to public pressure, the bank may take a more interventionist approach, henceforth. Fourth, maintenance of a foreign reserve This is a responsibility of the Monetary Board. International reserve as authorized under MLA should consists of gold and liquid foreign currency assets such as foreign currency notes, foreign government securities, deposits with international banks and international fund transfer instruments Greek bonds. Such reserve has been about 70% – 80% of assets of the Central Bank. There is a misunderstanding even among staff of the Central Bank that the foreign reserve should be managed like assets portfolio with a preferred risk- return balance for business and profit. This is wrong. International reserve under MLA is a reserve, not a trading portfolio, held for the purpose of meeting foreseeable deficit in the international balance of payment of the country and thereby to support greater exchange rate stability and free use of Sri Lanka rupee for current international transactions. Therefore, international reserves should comprise a highly liquid reserve without any known or estimated risk-taking.