Banks show increased willingness to lend first time in two years

• CB survey says overall willingness of banks to lend up in 2Q
• Expectations rife for banks showing further desire to lend in 3Q
• Sufficient capital adequacy and improved liquidity of banks key reasons 
• SMEs leading as highest desired sector for loans

Sri Lanka’s willingness to lend, which recorded a continuous decline in every quarter since fourth quarter of 2018 has staged a substantial rebound in the second quarter this year with expectations for further desire to lend in the third quarter—a sign that credit is flowing unabated to the real economy after the Monetary Board cut interest rates multiple times. 

According to a survey carried out by the Central Bank recently, overall willingness of banks to lend has marked a 30.4 points increase in the 2Q20 on a quarter-on-quarter basis across all lending categories with the outlook for the third quarter pointing to a further expansion with a 46.7 points increase.

Sufficient capital adequacy position and improved liquidity position of the banks have been main triggers of this increase in the willingness to lend. 

“Respondents cited that measures taken by the Central Bank of Sri Lanka to support the revival of economic activities, which were affected by COVID-19 pandemic, improved their liquidity position,” the survey report stated. 

The Central Bank data for July showed that outstanding loans to the private sector declined by only Rs.3.6 billion, decelerating from Rs.54 billion in June and Rs.70 billion in May as fresh loan disbursements reached above pre-pandemic levels indicating that economic activities are rapidly gaining momentum after the coronavirus related restrictions. 

The outlook for willingness to lend by category of loans showed small and medium enterprise (SME) sector leading as the highest desired sector, followed by retail, State-owned enterprises and corporate. 

Further, the banks which responded to the survey, have indicated that they expected the highest demand for loans to generate from SMEs during the third quarter.

State patronage to re-build domestic industries has never been this forthcoming in decades as the government has provided space for SMEs to build scale by restricting imports and creating ministries for every sector deemed as a priority economic sector, from pottery to handloom to advanced technology-based agriculture.  

On the other hand, the Central Bank has reduced borrowing cost significantly and undertaken to guarantee such credit given to businesses, creating an oasis to nurture and build businesses and industries domestically, which can conquer the global market in the time to come.  

In an indication that loan applications are being rapidly processed, rejected loan applications have also decreased in the second quarter with further downtrend expected in the third quarter. 

“ ….in line with the expected increase in willingness to lend in 2020 Q3, banks expect a decrease in rejected loan applications, at a higher pace, across all lending categories in 2020 Q3 compared to 2020 Q2.,” the survey said. 

However, the banks expect the non-performing loans to increase further, although at a slower pace during the third quarter.