Private credit eases in May but state borrowings surge

Credit extended to the private sector by the banks continued to decelerate as the latest data for May showed that private sector credit growth for the first time in many months had settled below 20 percent, but still above what the policy makers would have liked it to be. 

During May, Sri Lanka’s banking sector has granted a total of Rs.30.9 billion in credit to the private sector, less than half of Rs.80 billion a month loaned when the country was running easy monetary and fiscal policies but higher than Rs.18.9 billion loaned in April 2017. 

On an year-on-year basis, this growth in credit has decelerated to 18.9 percent in May from 20.0 percent in April 2017. 

During the first 5 months, on cumulative basis, the banks have in total loaned about Rs. 221 billion in  comparison to Rs.273 billion during the corresponding period last year. 

However, the money supply in the economy measured by the broad money or M2b continued to grow at an accelerated pace of 21.4 percent in May as opposed to 20.1 percent in April, predominantly due to the massive jump in net credit granted to the government. 

In May alone, the government borrowed as much as Rs.33.5 billion against a contraction of Rs.9.0 billion in April. 

Meanwhile, the credit extended to the public corporations rose by Rs.66.3 billion during the first 5 months. In 2016, credit to the state-owned enterprises contracted by Rs.28 billion. 

The recent data for private credit demonstrate that the earlier monetary policy decisions are gradually taking effect even after a considerable lag between the action and the effect. 

Generally, there is a 12 to 18 months monetary policy transmission lag in Sri Lanka. 

Sri Lanka’s private sector credit trended downwards as both the nominal and real interest rates remained high throughout this year. 

But the government securities yields have been easing from late April onwards filtering through to the bank interest rates. 

Banks are also operating with significant amount of excess liquidity in recent times as a result of the lacklustre growth in loans in comparison to some strong deposits they raised. 

As a result, the banks now operate with significant amount of excess liquidity which is weighing on the interest rates to trend downwards. 

The banks also raised sizable funds through equity in recent times in response to new BASEL III capital rules which could stay idle until they foud some lending opportunities. 

This could also pressure the interest rates to come down. Meanwhile, the money market excess liquidity also turned a surplus of Rs.11.3 billion by end of July due to some prudent monetary policy management and also due to less fiscal pressure stemming from government borrowings. 

The Central Bank expects no more than 15 percent growth in private sector credit growth for 2017. 
But the target could become a tall order to achieve should easing in rates translated to pick up in loans during the 2H17.