State bank lending to SMEs likely to be reason for high credit growth: CB

By Chandeepa Wettasinghe

Large state banks lending to small and medium enterprises (SMEs) through government influences could be one reason for the moderately high private credit growth rate this year, the Central Bank said recently.

Most private bank loan books have been growing at single digit or low double-digit figures so far this year, while private credit growth, which remained in the low 20 percentages for the first four months of 2017, slowed down to 18.9 percent and 18.6 percent, respectively this May and June, although in absolute values, the total private credit this June topped Rs.80 billion. 

“I think partly there is the government attached high priority to SME development. There’s about four to five priority areas the government has identified and I think they’ve been encouraging the state banks to lend to those sectors,” Central Bank Governor Dr. Indrajit Coomaraswamy said.

Dr. Coomaraswamy said that the credit quality of the loans will matter.

“Of course it’s important that the credit quality is maintained. From a regulator’s point of view, you need to balance the increase in credit with quality,” he said.

There have been fears among civil society activists that the SME loans are being used by the borrowers for consumption purposes and that this has trapped vulnerable socio-economic groups in debt. Sri Lanka has poor financial literacy, according to academics.

Dr. Coomaraswamy himself this May said that SME borrowings are being observed to see whether such funds are being used to finance speculative luxury property purchases. These luxury apartment sales have witnessed a sharp decline of late, which Dr. Coomaraswamy acknowledged.

However, last week the Central Bank governor said that the regulator has not yet witnessed a perceptible rise in non-performing loans. The state banks could be lending to the five priority areas specified under the last budget. The finance minister had proposed banks to extend certain portions of their credit to agriculture, tourism, SMEs, females and youth. The Central Bank had issued a circular encouraging the banks to follow this proposal but did not direct the banks to forcibly follow such criteria. Directed lending could cause unintended side effects in the economy. Such directed lending has not been a success in the past either. Allocating 10 percent of a bank’s loan book to agriculture under directed lending has been in practice for over a decade but according to economists, the relatively wide definition for ‘agriculture’ has seen banks predominantly lending to large diversified corporations.

State banks have shown resistance to tight monetary policy on more than one occasion. During the final months of 2016, the private credit extended by the state banks grew by over 30 percent, while the growth in other banks had averaged around 20 percent. 

Dr. Coomaraswamy last week said that the state banks were left with more cash during this period due to major state-owned enterprises, which usually require borrowings to cover losses, instead making profits. 

He said that this extra cash was extended to the private sector, which caused the anomaly. However, in December 2016, he had expressed his displeasure about the conduct of state banks.