Credit to private sector gains steam in May ahead of full impact from rate cut 

•  Commercial banks expand outstanding private credit by Rs.133bn
• That brings total private credit in five months to a mammoth Rs.495bn
• May credit translates to a faster 16.1% YoY growth in private credit
•  Credit spread across all sectors of the economy

Credit to the private sector by the licensed commercial banks picked up pace in May. This is after a brief slowdown in April caused by the festive season holidays. 

The movement indicates that appetite for credit remains high under considerably low borrowing costs while the banks kept their lending spigots wide open, seeking to extend their roughly two year long growth in private credit. According to the latest data, licensed commercial banks have expanded their total outstanding private sector credit by a robust Rs.132.9 billion in May, picking up from the Rs.87.0 billion growth in April.

What made the May growth even more compelling was the fact that it translated into a faster 16.1 percent growth over the same point last year. This was a pick up from the 15.2 percent growth seen in the 12-months through April 2025 and extends the year-on-year growth in private sector credit that began in November 2023. With May credit, the total private sector credit by licensed commercial banks in the first five months came in at Rs.494.5 billion.

The private sector credit turned to growth from a months-long decline starting from June 2023 when the Central Bank pivoted to cutting rates from their record high levels as the inflation looked to come sharply down from their unprecedented levels in 2022.

The easing financial conditions which corresponded to the rate cuts from June 2023 helped to revive lending activities by the banks as they gradually grew confident about the durability of the monetary easing cycle and also the recovery in the economy.

The conditions were further reinforced by the successful conclusion of the foreign debt restructuring and the decisive mandate at both the Presidential and General elections last year received by the now governing party, driving away the hitherto prevailed political and policy uncertainty.

Under these conditions, the economy also grew by 5.0 percent in 2024 aided by lower interest rates, sharp decline in inflation and the gradual strength in the external sector helped by the recovery in tourism, remittance flows and exports. Continuing its growth momentum, the economy grew by a further 4.8 percent in the first three months, predominantly from the sharp expansion seen in the industrial activities.

The Central Bank data available through March 2025 also showed that there has been a broad based dispersion of credit across all sectors in the economy.

The Central Bank cut its key policy rate by 25 basis points to 7.75 percent in May to further nudge lending rates down and thereby accelerate the pace of credit to the real economy amid other things such as to help steer the inflation towards its 5.00 percent medium term target.

The International Monetary Fund in their recently completed fourth programme review has said there is limited room for further rate cuts with the recent spell of deflation driven by supply factors. However, global shocks might prompt the need for further easing in the monetary policy, they added.