Sri Lanka’s banking and finance sector has extended as much as Rs.411 billion to the private sector as credit during the first seven months of 2016, showing little signs of slowing down, despite the multiple monetary tightening measures employed, the Central Bank data showed. In 2015, Sri Lanka saw the banking sector credit reaching a historical high of Rs.696 billion, as a result of a relaxed monetary policy and imprudent fiscal measures.
The interest rates were artificially kept low to boost consumption to deliver the election pledges of the new administration. According to the data released so far for this year, the highest monthly private credit was seen in March, where it grew by Rs.86 billion, followed by Rs.76 billion in June and Rs.63 billion in July. As cheaper bank credit led to the overheating of the economy, the Central Bank was seen tightening the monetary policy three times this year. But the full results of such monetary actions are yet to materialize. The Central Bank twice raised the key policy rates by 50 basis points each in February and July after increasing the banks’ statutory reserves ratio by 150 basis points in January to curb credit flows into the economy. However, the lag in monetary policy transition has led to slower effects in the real economy. The Central Bank in June said they were comfortable with a private credit growth of not more than 20 percent but the data so far has shown such credit having grown by over 25 percent in each month from January 2016 on a year-on-year basis.
The International Monetary Fund in September asked the Central Bank to remain vigilant to tighten the monetary policy further, should the inflation and the private credit growth showed signs of picking up. The Central Bank also did not rule out another round of monetary tightening. But the monetary authority appears to be confident of private credit falling below 20 percent by the end of this year. Meanwhile, during the first eight months of this year, the country’s banking sector’s total loans and advances have grown by as much as Rs.376 billion—the majority of which has been funded by deposits, which have grown by as much as Rs.452 billion during the same period. Despite the fast growth in loans, the asset quality has improved as the gross non-performing loan ratio in the sector has dropped to just 3.0 percent by the end of August.