Private credit gains steam on lower rates, economic revival

• Commercial banks expand loans by Rs.97bn in November, bringing 11-months tally to Rs. 601bn 

The commercial banks extended their months-long streak of growth in their loans to the private sector through November 2024. This reflected their willingness to lend more aggressively than before and also the appetite by the private individuals and businesses for more credit to support their consumption and investment needs in tandem with the robust recovery seen in the economy.

The latest data showed that commercial banks have expanded their total outstanding credit to the private sector by a robust Rs.96.6 billion in November 2024, picking up from Rs.74.3 billion in October.
The November expansion in credit brought the eleven months growth in total credit to Rs.601.1 billion and a 9.7 percent growth from the same period a year ago.
While the Central Bank typically announces their expected growth in credit to the private sector at the beginning of the year, they fell short of doing so this time too at their customary announcement of their policy agenda for 2025 and beyond, held last week.

While about a 10 percent growth in credit for an year is considered quite healthy, it was happening on the back of a de-growth seen in the total outstanding private sector credit in 2023. This is as the banks closed their lending spigots from the second quarter of 2022 through most part of 2023 in response to the bumper policy rate hike by the Central Bank. That 700 basis points hike in key policy rates in April 2022 was delivered on the premise that inflation at the time was caused by higher demand conditions.

This resulted in a response where rates were raised at exponential levels which killed both the demand and the supply too, for a prolonged period, effectively exacerbating and extending what could have well been short term period of hardships caused by the increase in global commodities prices and the after effects of the sudden floating of the currency. The steep increase in the lending rates and the resulting tightening of financial conditions prevailed until the early part of 2024, shrank the outstanding private sector credit before the market lending rates started easing more meaningfully and the economy showing more evidence of recovery.