Banks grant record loans in October despite rising interest rates

The new credit granted by Sri Lanka’s banks marked a record growth for the year during the month of October, accelerating from the previous high in September, as the borrowings appear to be continuing defying the rising market interest rates.  

According to the latest Central Bank data seen by Mirror Business, Sri Lanka’s banks have given total loans worth of Rs.151 billion in October, which translated into a year-on-year (YoY) growth of 18.8 percent, up from 17.2 percent in September.

This is nevertheless a slight decline from the Rs.161 billion loans given in September, on an absolute basis.

In an earlier report, Mirror Business showed a surge in private sector credit in September. But the October data remains insufficient to conclude which sectors of the economy—private or public—have driven the numbers for the latest month.

In September, Sri Lanka’s banks gave a significant Rs.107.3 billion in new private sector credit, out of the total bank credit of Rs.161 billion recorded for the month.

And the Central Bank said the spike in such credit was short-lived and attributed the growth to businesses borrowing in advance in anticipation of further measures to curb excessive spending on imports.

The Monetary Board in November raised the Statutory Lending Facility Rate by 50 basis points to 9.00 percent but it cut the banks’ reserves ratio by 150 basis points in an attempt to neutralize the net impact.

In any case, excessive borrowings by the private sector or the state sector create inflation and overheat an economy unless the products and services manufactured increase in tandem.This is the reason why Sri Lanka’s Central Bank is shifting to inflation targeting from money targeting as the outcome of its monetary policy, as price stability is a key objective of any central bank.

Sri Lanka’s consumer prices rose by 3.3 percent during the 12 months to November, on higher food prices and healthcare-related expenditure.
Sri Lanka has been identified as a country with relatively high food prices as a huge stock of money is chasing a stable or small stock of produce, causing demand-driven inflation.As inflation pushes up prices of every commodity, all source of production from labour cost to rentals to cost of funding goes higher, resulting in higher prices of the end product.This produces toxic results by killing new enterprises and thereby the ability to create jobs domestically, making every government to deal with a never-ending unemployment crisis.