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espite Central Bank’s (CB) push to cut lending rates, the broad uncertainty prevailing in the market over the ability to sustain low interest rates in the foreseeable future is seen keeping prospective borrowers at bay, leading to low demand for credit.

According banking sector analyst at Softlogic Stockbrokers, Asanka Ranasinghe, there was some uncertainty among the SME’s and consumers if these low rates would stabilize in the medium term.

Sri Lanka’s credit growth slowed to 2 percent in June 2014, lowest since 2010, but the economy has been expanding over 7 percent

“However, now there is some positivity in the market that the rates would stabilize at least for the next one to one and a half years.
We have seen some SME activity picking up from 2Q14 onwards,” he said.

Meanwhile, Sampath Bank PLC Chief Financial Officer (CFO) Ranjith Samaranayake noted that although the banks were trying their level best to promote loans through slashing lending rates in line with the CB guidelines, “there is very dull demand for credit in the market”.

In quite an unusual move, the CB last week contained the bank’s ability to park their excess liquidity at the Standing Deposit Facility at an annual interest rate of 6.5 percent more than thrice a calendar month, forcing banks to push this excess liquidity to the market.  

Sri Lanka’s credit growth slowed to 2 percent in June 2014, lowest since 2010, but the economy has been expanding over 7 percent, a scenario which is dubbed as a ‘creditless growth’ by the ex-Central Banker and economist Dr. W.A Wijewardena.

Meanwhile, apart from low demand for credit from SME’s and other consumers, big corporates are also not borrowing from the banking sector as they have been operating with high liquidity by funding through corporate debt issues during the last two years.

According to Nations Trust Bank PLC Chief Executive Officer Renuka Fernando, traditionally the credit growth in the second half of a fiscal year has been higher than its first half.

Meanwhile banking sector analyst Ranasinghe said they did not expect a significant growth even during the 3Q14.

“But we are bullish on the 4Q14 and in particular 2015. We expect no less than 15 percent credit growth for 2015,”
Ranasinghe added.   

However, according to the state banking giant, Bank of Ceylon General Manager D. M. Gunasekara, lending rates still remain relatively high due to the fact that deposits could not be re-priced until they reach maturity.

“There are lots of deposits that will be re-priced within the next three months and therefore I believe once they are re-priced the lending rates will further come down,” said Gunasekara, talking on behalf of BoC’s over Rs. 1 trillion asset base.   

However, the largest private sector licensed commercial bank, Commercial Bank of Ceylon PLC CFO Nandika Buddhipala opined otherwise.

He said the banks have reduced lending rates and have witnessed a relatively healthy credit growth, coming out from the contraction in the pawning portfolio which was halved from last year to around Rs.300 billion. Ransinghe estimates the private credit to have grown by at least 10 percent, leaving aside the anomaly in the pawning portfolio contraction.

Sri Lankan banking sector is coming out of a credit bubble witnessed in 2009 through early 2012 which peaked to 34 percent in 2011. This resulted in banking sector asset quality to deteriorate to 5.6 percent by end of 2013 from 3.7 percent a year ago.