Private credit expansion continues through July; but future trajectory remains uncertain

Credit to the private sector had continued to expand with vigour in July with little change from a month ago, underscoring Central Bank’s decision a fortnight ago to raise interest rates from record low levels, as it projected confidence over the continued momentum in credit flows to the private sector despite the rate increase. 

The latest data published by the Central Bank showed that licenced commercial banks had expanded their total outstanding private sector credit by Rs.76.6 billion in July, slightly lower from Rs.83.4 billion in June.

It appears that both large and small businesses are slowly getting accustomed to carry on their operations unabated amid virus related restrictions, while expanding their capacities. However, prolonged virus-related restrictions could challenge their limitations and force them to slowdown.  

This may be why the Central Bank wasn’t too worried about its recent decision to raise interest rates to have any major impact on the pace of the credit growth and the economy’s ability to record 5.0 percent expansion in 2021, mostly on lower base effects last year. 

The July credit expansion also translated to a robust 14.3 percent growth in private sector credit from a year ago levels, well above Central Bank’s 12 percent target for the year and accelerating from the 12.9 percent recorded in June 2021. 

“The momentum of credit expansion is expected to continue in the period ahead, with increased credit flows to productive and needy sectors of the economy,” the Central Bank stated during the last monetary policy review.
The Central Bank believes the upward movement in interest rates and the hike in the banks’ reserve ratio would in fact help banks to absorb part of the record high money circulation to channel back into the real economy. 

“We are looking at more than Rs.280 billion increase in currency in circulation since the onset of the pandemic,” said Dr. Chandrananth Amarasekara, Director of Economic Research Department at Central Bank. 

“And obviously with higher market deposit rates and also with the liquidity deficit in the interbank market, we expect banks to absorb a large part of this currency in circulation out there and route them into more productive purposes,” he stressed. 

With July credit, licenced commercial banks have extended private credit worth Rs.491 billion during the seven months, surpassing the total private sector credit of Rs.374.1 billion in 2020 and Rs.235.5 billion extended in 2019.