The Central Bank yesterday said it remains vigilant over a possible creation of a construction bubble due to the runaway credit growth.
“The biggest, in terms of sectoral distribution of credit, is construction. That is something we’re looking into whether there’s a possibility of a bubble. We’re studying that very carefully,” Central Bank Governor Dr. Indrajit Coomaraswamy said.
Total private credit extended had reached an all-time high in 2016 exceeding Rs.750 billion.
Construction—both public and private—had contributed 7 percent to gross domestic product (GDP) during the first three quarters of 2016, falling from 7.3 percent of GDP during the same period in 2015, as the incumbent government had delayed projects started by the previous administration.
The real estate sector experts too have recently said that there is a real estate bubble in Colombo, which would remain until the apartment trend subsides and have blamed the government for warping prices by selling land in Colombo for high prices to foreign developers. There are some concerns that luxury apartments are not being sold, creating a glut in the market.
Meanwhile, the Central Bank recently issued a circular recommending the banks to allocate up to 50 percent of their loan portfolio to identified sectors such as agriculture, tourism and export-oriented enterprises.
Further, limits were placed on borrowings when financing vehicles, which would lower demand for credit in the automobile sector, requiring financial institutions to lend more to other sectors, since many have gone for fundraising recently to meet the growing credit demand.