Despite the record high banking sector credit granted in recent years, Sri Lanka’s private sector credit still stands amongst the lowest in comparison to the size of the economies in the Asia Pacific region, the data compiled by Fitch Ratings Lanka showed.
According to the data, Sri Lanka’s bank credit as a percentage of gross domestic product (GDP) stood around 45 percent by end-2016.
This is much lower than the 130 percent in Singapore and Malaysia, 150 percent in Thailand and 140 percent in Australia. In India, the private sector credit to GDP hovers around 52 percent.
In developed markets such as the Unites States and United Kingdom, private credit to GDP stands 190 percent and 134 percent, respectively.
However, in comparison to countries such as the Philippines and Indonesia, where the credit to GDP ratio is around 40 percent, Sri Lanka stands somewhat ahead.
Sri Lanka’s low private sector credit against the size of its economy demonstrates the large role the country’s banks play in supporting businesses, investments and thereby the economy.
Sri Lanka’s private sector credit to GDP stood slightly above 30 percent from 2011 to 2014 before it shot up in 2015 and 2016 as the new regime, which came to power in 2015, kept the interest rates artificially low to stimulate growth.
During 2015 and 2016, Sri Lankan banks granted Rs.692 billion and Rs.750 billion in credit, respectively, recording the highest ever credit granted in a single year.
However, the banks now find it challenging to expand their loan books due to tough operating conditions stemming from higher interest rates, taxes and inflation.
The Fitch Rating therefore has a ‘Negative’ outlook on the sector for 2017.
Nevertheless in January, Fitch Ratings revised down Sri Lanka’s banking sector Macro-prudential Risk Indicator (MPI) score to ‘2’ from ‘1’, elevating the sector’s risk to ‘moderate’ from ‘low’ as the banks recorded over 15 percent growth in credit for two years consecutively, which stoked fears of possible bubbles in certain markets such as property and real estate.
During 2015, Sri Lanka’s private sector credit grew by little over 20 percent and by 18 percent in 2016.
The Rajapaksa administration initiated a banking and financial sector consolidation plan to create larger banks which have the capacity to fund larger projects and thereby help assist the growth of the economy.
This idea was later abandoned by the good governance regime saying mergers and acquisitions of banking and finance institutions must be shareholder-driven.