July private credit reflects faster new loan disbursements by banks

• Decline in private credit only Rs.3.6bn, down from Rs.54bn in June 
• Low interest rates, CB liquidity and credit guarantee scheme identified as main triggers.

The decline in private sector credit narrowed in July, signalling that the new loans by the banking sector to private individuals and businesses were just about to surpass the loan settlements by the borrowers, which could set stage for a net growth in credit since the coronavirus outbreak in the country. 

According to July data, the total outstanding private sector credit or net credit to the private sector by banks, declined by only Rs.3.6 billion, decelerating from Rs.54 billion in June and Rs.70 billion in May. 

Data on gross disbursements of loans for July—a leading indicator for private sector credit— for the same month showed that such loans had surpassed the pre-pandemic levels. The Central Bank identified the development as the economy’s readiness to “move beyond the recovery phase to an expansion phase”. 

Private sector credit, which shot up to Rs.120 billion in March, on optimism on the economy after the tax cuts, low borrowing costs and the policy and political stability, plunged to just Rs.13 billion in April, due to the coronavirus outbreak.

However, with the ending of the coronavirus curfews, banks ratcheted up lending activities from June and accelerated such in July, as the Central Bank provided credit guarantee on loans up to 80 percent while their cost of funds fell sharply with the Central Bank, cutting policy rates and slashing banks’ statutory reserve requirement.

Eased rules on capital adequacy also gave banks more wiggle room to expand their loan books without having to resort to additional capital raising.  

Although private sector credit was net negative in July, the government continued its borrowing binge from the banking sector, with Rs.170 billion being loaned to the state afresh. This is in comparison to the Rs.133.8 billion borrowed by the government in June. 

The state leaned heavily on the banking sector during the coronavirus pandemic to power up the economy through fiscal stimulus, as the cost of domestic borrowings became cheaper. 
The one-year treasury bill rate fell to 4.89 percent at the auction held last week, from 8.45 percent at the beginning of the year. 

The government spending helped the money circulation in the economy maintained at fairly elevated levels. 

The money supply measured by broad money or M2b expanded by 15.7 percent in July from a year ago, accelerating from 14 percent in June. 

Meanwhile, the outstanding credit to public corporations increased by Rs.31.3 billion in July, compared to a Rs.1.3 billion decline in June.