Central Bank imposes 20% small biz lending target for banks

• Not satisfied with pace of private sector loans growth  
• Growth in personal loans surpasses loans to priority sectors 
• CB targets private sector credit to grow by 14% or Rs.864bn in 2021

The Monetary Board of the Central Bank wants licensed banks to lift their loans to the small business sector by a minimum of 20 percent in 2021, as it is not satisfied with the pace of the loan growth to the private sector, specifically to priority sectors. 

The Central Bank was flirting with the idea of minimum lending targets for licensed banks for priority sectors of the economy since November last year before the Board turned decisive in January this year as it asked the banks to grow their loans to the micro, small and medium enterprises (MSMEs) by 20 percent in 2021 from current levels. 

The Monetary Board at its second meeting held last week to take stock of the efficacy of their earlier policy action expressed dismay over the pace of growth in private sector credit in general, and particularly into the productive sectors of the economy. 

“The Board noted the recent slowdown in credit disbursements to the private sector and inadequate lending to productive sectors of the economy, and stressed the need for the financial system to actively lend to productive sectors in order to support the ongoing recovery of domestic production-based economic activities,” the statement issued by the Monetary Board following their meeting on Wednesday said. 

The data through the end of 2020 showed that personal loans had led the rest of the sectors, recording the highest growth—15.1 percent year-on-year — with industry and agriculture remaining as distant second and third, with growths of 4.7 percent and 3.9 percent year-on-year, though they showed acceleration towards the year-end. 

However, loans to the services sector remained a sour spot as sector loans lost steam at 1.4 percent, with virus related restrictions towards the fourth quarter of last year. 

While the 20 percent growth target will remain in tact through the remainder of the year for the MSME sector, the Central Bank is continuing its engagement with the banks to explore how it could further enhance the speed of the credit flow into multiple small business sectors, within that broader target. 

This way, the Central Bank expects the pace of private sector credit to accelerate in the months to come. The Central Bank targets private sector credit to grow by 14 percent or Rs.864 billion in 2021. 

“Going forward, the growth of credit to the private sector is expected to gather pace supported by low lending rates, the introduction of priority sector lending targets for banks on lending to micro, small and medium scale enterprises sector, and rising demand for credit driven by improving investor sentiments,” the Monetary Board statement said. 

“Discussions with the banking community and other stakeholders are ongoing to rectify deficiencies in relation to extending credit to productive, growth-supportive, sectors,” it added. 

After many decades, Sri Lanka has now achieved the hardly seen harmony among low interest rates, low inflation and low taxes—the key variables indispensable for quicker economic take off and higher disposable incomes of people.