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Despite much optimism over the 2H14 private sector credit growth, the latest data shows that Sri Lanka’s banking sector credit to the private sector firms and the personal customers in July has dipped to a new low of 0.8 percent from a year ago.

According to a monthly economic and business sector bulletin issued by a local management consultancy, the 0.8 percent credit growth has been the lowest since more than six and a half years ago.

“Credit to private businesses and personal customers grew just 0.8 percent year-on-year (YoY) in July 2014 to Rs.2,481.9 billion, a 56-month low,” Gradient Alliance said.

The local consultancy blamed the higher import tariffs, consumption taxes slapped on the consumers and also the scarcity of certain commodities for the existing private credit situation as they have not only lowered the disposable incomes but also dampened the consumer confidence

Sri Lanka’s private credit growth has been behaving in the opposite direction to the monetary policy actions and the published economic growth figures, a scenario identified as ‘creditless growth’ by economists.

Sri Lanka’s private credit growth fell from a high of 34.5 percent in 2011, 23.5 percent in 2012, 8 percent in 2013 and further down to 2 percent in June 2014. But the economy grew by 7.6 percent and 7.8 percent in 1Q14 and 2Q14, respectively.

The Central Bank (CB) targets a 16 percent private credit growth for 2014.

The extremely low credit growth is despite the CB cutting its key policy rates by 125 basis points each from December 2012 through January 2014, leaving the Standing Deposit Facility Rate (SDFR) at 6.5 percent and Standing Lending Facility Rate at 8 percent for the ninth consecutive month.

After releasing the first half (1H) credit growth data, CB Governor Ajith Nivard Cabraal reiterated that there would be a relatively high private credit demand in the 2H.
Meanwhile, it was only recently Nations Trust Bank PLC CEO Renuka Fernando stated that traditionally the 2H credit growth had been higher than its 1H in the banking sector.  

The Central Bank a couple of weeks ago announced a reduction in the interest rate paid for the excess moneys parked by commercial banks in its Standard Deposit Facility (SDF), if a bank uses the facility more than three times a calendar month.

Accordingly, a commercial bank can keep its excess money in the SDF at an annual rate of 6.5 percent only three times during a calendar month and further deposits will be paid a lower interest rate of 5 percent per annum.

This was done with the intention of forcing the banks to lend these excess liquidity, which amounts to as much as Rs.300 billion, to the productive sectors in the economy, without letting to idle at the CB.

Last week, it was revealed that the small and medium enterprises (SMEs) and the personal customers were reluctant to borrow, despite the lending rates remaining low due to uncertainty over the ability of the authorities to sustain the rates at the same levels for a foreseeable future.

Beside the negative impact from pawning loans, which still remains sluggish, Gradient Alliance identifies prices of trade and industry-related activities becoming too expensive as another factor for the weak credit growth

The local consultancy blamed the higher import tariffs, consumption taxes slapped on the consumers and also the scarcity of certain commodities for the existing private credit situation as they have not only lowered the disposable incomes but also dampened the consumer confidence.

“For example, in construction, the cost of construction material is at an all-time high, prices of motor vehicles are high due to the revised valuation methodology and high import tariffs, food prices are increasing due to higher import levies on select goods and scarcity of select vegetables,” they said.