Sri Lanka, Sept. 27 -- Sri Lanka's recent lending rate cut will compress banks' net interest margins (NIMs) and add to their existing profitability challenges, Moody's Investors Service said.

On 24 September, the Central Bank mandated commercial banks to cut lending rates on all Sri Lankan rupee-denominated loans by at least 200 basis points beginning 15 October from rates set on 30 April 2019.

"We expect banks' NIMs to narrow after the lending rate cut since the cut's immediate effect more than offsets a more gradual decline in funding costs because of the time lag in the re-pricing of time deposits," the firm said.

"Narrower margins will strain bank profitability, which is already weakened because of rising credit costs and a higher ef...