Bank credit reaches over Rs.100bn in February

• Banks grant Rs. 102 bn in new loans in February 
• Private credit in first two months tops Rs.100bn

Sri Lanka’s banking sector in total has pumped in over Rs.100 billion in fresh credit to the economy during February from a minus growth recorded in January as the growth in private sector credit and credit to the public corporations rose although the credit to the government eased. 

In February, Sri Lanka’s banking sector granted Rs.102 billion in new loans, of which Rs.59 billion went to the private sector, Rs.17 billion to the State-owned Enterprises (SoEs) and Rs.25 billion as net credit to the government. 

In February, the growth in private sector credit marks a slight moderation to 14.6 percent from 15.2 percent a month earlier. 

In January, banks gave Rs.41 billion to individuals and business as consumption and investment credit, bringing the total private sector credit during the first two months of 2018 to Rs.100 billion. 

Sri Lanka Monetary Authority this week surprised the market with a 25 basis points cut in the Standing Lending Facility Rate to 8.50 percent, which will effectively narrow the policy corridor between the ceiling and the floor rates. 

The Central Bank will further narrow this policy corridor, which now stands at 150 basis points, which will give them tighter control over short-term interest rates. The Central Bank said the moderating price levels in the economy and the easing in the private sector credit growth gave them some space to ease the key policy rate than staying put as widely expected. 

However, the Central Bank is riding a tight rope by cutting the lending rate because such action could stoke demand for fresh loans for consumption, which was tamed to a certain degree after years of struggle. 

Cheap credit could overheat the economy, expand trade deficit further through higher imports, weaken the rupee and drive the economy again closer to another balance of payment crisis.

Wednesday’s rate cut came amid the International Monetary Fund constantly asking the Central Bank to stand ready to tighten the monetary policy should inflation and credit show signs of increasing. 

In the absence of a solid production base, ideally an export-oriented one, Sri Lanka often runs into crisis whenever it makes access to money easy for people by reducing its cost i.e. the interest rates.

Meanwhile, new bank credit data for February shows month-on-month increase in net credit to the public corporations by Rs.17 billion from a contraction of Rs.7 billion in January. 

The longer the SoE reforms take, the higher the risks stemming from them spilling over into the monetary sector.

Ceylon Electricity Board is heavily tilting towards the high cost thermal power and the delay in formulating a pricing formula will burden the state banks.

The same applies to the Ceylon Petroleum Corporation. Higher fuel imports at relatively higher prices have already started pinching the economy as the trade deficit reached a new high in January. 

Meanwhile, the net credit to the government in February fell to Rs.25 billion from Rs.52 billion in January demonstrating some improvement in the State fiscal performance in recent times. 

However, any deviation from the fiscal consolidation path could spill over into the monetary sector, which has to be managed through tightening of monetary policy.