CB to meet state banks over high credit growth

By Chandeepa Wettasinghe
The Central Bank will be entering into discussions with the top management of state banks in the country through which private credit had expanded at unnaturally high rates, in a bid to cut down credit growth.
“State banks have responded less to the tightening of monetary policy, and we intend to speak to them and see how this can be addressed,” Central Bank Governor Dr. Indrajit Coomaraswamy told reporters this week.
He said the state-owned Bank of Ceylon and People’s Bank, which are the two largest banks in the country, had recorded year-on-year credit growths of 30 percent and 32 percent, respectively, in 2016.
Dr. Coomaraswamy said it seems that state banks are not as sensitive to interest rates as the Central Bank wants them to be, which distorts the monetary policy transmission to the market. 
However, he declined to specify what action would be taken, nor what will be discussed with the state banks.
He said the market interest rates are now naturally moving upwards in response to government lending requirements, and said that the rest of the market is also responding well to past monetary policy tightening measures.
“Other banks, both the domestic private banks and foreign banks (credit growth) are below 20 percent now,” he said.
The Central Bank had early last year set an annual credit growth target of 15 percent in order to avoid overheating of the economy before revising the target up to 20 percent later during the year.
Dr. Coomaraswamy said the Central Bank is worried about the continued high levels of private credit growth, which was 21.9 percent in 2016, during which credit growth hit an annual high of 28.5 percent in July.

The Central Bank had tightened policy rates twice through during the first half of last year, after the government slashed rates artificially to boost consumption during the election year of 2015. Further, the statutory reserve ratio was also increased in December 2015.
Despite the higher than expected private credit growth and the all time high total private credit extended in 2016, Dr. Coomaraswamy said that the economy has not overheated too much.
“It happened at a time when there was fairly significant fiscal tightening. If on the fiscal side we had a slippage and recorded credit, I would have been very, very concerned,” he said.
Despite fiscal tightening, inflation has started to creep up. However Dr. Coomaraswamy said that inflation is not being driven by demand, but through supply side pressure from weather anomalies and increased taxation, therefore not warranting further monetary policy tightening.