Despite the slight slowdown seen in private sector credit granted by the banking system in the country in October on a year-on-year (YoY) basis, the month marked the highest credit granted in absolute terms after March this year, bringing the total private sector credit granted during the first 10 months to a historically high, an analysis by Mirror Business showed.
In October, the banking system in total granted Rs.79 billion worth of private credit, recording a spike from the Rs.58.4 billion a month earlier. Earlier, the highest private sector credit was recorded in March this year, which was Rs.86.4 billion.
This was despite the slowdown in the YoY growth in private credit to 22 percent in October from a high of 25.6 percent in September.
Country’s monetary authority last week left its key policy rates unchanged based on this slowdown seen in private credit on a relative basis from a year ago indicating their optimism of further slowdown in private credit in the coming months.
“In the monetary sector, year-on-year growth of credit extended to the private sector by commercial banks witnessed the anticipated deceleration,” the Monetary Board said in its monetary policy review for December.
Nevertheless, the headline inflation accelerated to 4.1 percent in December, with signs for further increase in prices in the near future, which might demand further tightening measures.
However the deceleration in money supply to 17.8 percent and the rupee liquidity turning a surplus in December gave some headroom for the Monetary Board to hold the rates for the fifth consecutive month.
A month ago the International Monetary Fund (IMF) expressed its concerns over the private credit which still remained, “very strong” despite multiple rounds of policy tightening and asked the Central Bank to operate with sufficient policy room for further tightening if situation did not turn favourable.
“As I mentioned earlier, despite the increasing in policy rates and going back even further in increasing the statutory (reserve) ratio in January this year, which all have contributed to some tightening of liquidity, credit growth has remained very strong and going forward we will keep monitoring the inflation and credit growth,” the IMF Mission Chief, Jaewoo Lee Lee told the reporters in Colombo via teleconference from Washington, D.C.
Sri Lanka raised its key policy rates twice this year by 50 basis points each and earlier raised the banks’ statutory reserves ratio (SRR) by 150 basis points to curtail funds available for loans.
But these actions have so far yielded limited results and the authorities relate this to general lag in monetary policy transition.
The desired level of private sector credit for the IMF as well as the Monetary Board is below 20 percent.
Meanwhile, Sri Lanka’s banking sector has granted Rs.594 billion worth of private credit during the first 10 months in 2016, marking the highest recorded in a similar period in the history. This translates to an average Rs.60 billion private credit for a month.
In 2015, the total private sector credit granted was Rs.693 billion, an all time high recorded in a year as the combination of myopic fiscal and monetary policies spiked the demand for cheap bank credit, which later went on to bust the rupee and plunge the country into a balance of payment crisis.