Central Bank hopes to end 2021 with Rs.850bn in private credit, most in any year

Returning to its originally set target at the beginning of the year, the Central Bank last week said it expects to end the year with a total private sector credit growth of Rs.850 billion, which translates to a robust 14 percent growth over last year, reflecting that such credit has still more room to run its course in an economy which still operates with significant slack due to the pandemic. 

Among the economic readings, monthly private sector credit has been a rare outlier, which broadly defied the pandemic induced economic restrictions to come out strong. 

For instance, such credit surged to Rs.134.1 billon in August, the highest since at least three years, bringing the cumulative private sector credit extended by licensed commercial banks in the eight months to Rs.625.1 billion, an increase of 15.1 percent from a year ago. 

The Central Bank last week left its key policy rates unchanged claiming it neither wants to dampen the pace nor needs to accelerate it further, as it took a view that the monetary policy cannot be too restrictive of the economic growth, which is just coming off from the virus induced restrictions. 

“By the end of the year, we expect the banking sector to release about Rs.850 billion as private sector credit and the credit growth is expected at about 14 percent by the end of this year,” said Dr. Chandranath Amarasekara, Director Economic Research at the Central Bank. While the cumulative disbursements are likely to be within reach by the yearend at the current pace of growth, it will also be the most in any year and would demonstrate that the pandemic hasn’t been able to subdue the appetite for credit by businesses and the individuals buoyed by the historically 
low interest rates. 

While there has been some uptick seen in the market lending rates since the August policy rate hike by 50 basis points and the increase in banks’ statutory reserve ratio to 4 percent from 2 percent effective September 1, that hasn’t still emerged as a deterrent for borrowers.

“We see that market interest rates adjusting upwards in response to tightening of monetary and liquidity conditions, yet they are still at a lower level compared to the high rates that we observed in 2016, 2017, 2018 and 2019,” Dr. Amarasekara added. 

While there has been an increase in the average weighted prime lending rate (AWPLR), the average weighted lending rate (AWLR) and the average weighted new lending rate (AWNLR) haven’t moved much so far. 

According to Central Bank data, the two rates are still down by 421 basis points and 476 basis points respectively to 9.38 percent and 8.04 percent by October 13. The two rates are the closest representation of the average rates of loans to small and medium businesses and 
consumer loans.

The Central Bank isn’t also worried about the inflation fears from the envisaged level of private sector credit as they note the demand side inflationary pressures are well anchored although there could be some spike in the near term, predominantly coming from the global supply chain bottlenecks and the recent upward price revisions while ruling out double digit inflation. 

Prices in the Colombo district rose 0.3 percent in September, slowing from 0.7 percent increase in August, but consumers paid 5.7 percent higher prices from a year ago, compared to 6.0 percent increase during the twelve months through August.