Private credit growth eases in Feb. in response to rising rates, uncertainty

• Banks extend Rs.33.5bn in private credit in Feb., recording a 12.3% annual growth
• In 2021, SL’s licensed banks unleashed Rs.810.5bn in total private sector credit
• Analysts expect growth to falter this year and end the year with half of the total credit extended in 2021

The private sector credit, which rose at a faster clip in 2021, has shown cracks during both January and February, as the monetary tightening and increasing macroeconomic uncertainty weighed heavily on the credit flows from banks to the real economy. 

This is because banks turned extra cautious over lending amid the uncertain trajectory of the interest rates until last week and grew increasingly skittish over the potential fallout of higher rates and the dourer macro conditions on their asset quality and earnings. 

The Central Bank last Friday sent a clear message to the financial markets by raising interest rates by an unprecedented 700 basis points and decided to lift the remaining caps on select lending products. 

According to data, the licensed commercial banks have extended Rs.33.5 billion in private sector credit in February, recording a 12.3 percent annual growth. This is after a Rs.36.1 billion growth in the outstanding private sector credit in January, which clocked in a 13.4 percent growth.  In 2021, Sri Lanka’s licensed banks unleashed Rs.810.5 billion in total private sector credit, with a growth of around 13.5 percent—the highest ever amount in a single year. 

However, the banking sector analysts expect the growth to falter drastically from April onwards from a potential rise in March, due to seasonality and perhaps would end the year with half of the total credit extended in 2021. 
The 700-basis point rate hike could potentially translate into a 10-15 percent increase in lending rates from this week, as all loan products will get repriced at a faster pace, sending tremors across lending markets. 

This could potentially result in a lot of defaults, bankruptcies, job losses and poverty across the economy, as the Central Bank intends to roll back any stimulus and tighten the money conditions to crush demand, in a bid to cool down the economy, which reported nearly 19 percent inflation in March. 

While the drastic adjustment in the rates may be required to reverse the demand pressures, another section of economists say the inflation is more of a supply-driven phenomenon than a demand-driven incident. 

The new Central Bank Governor Dr. Nandala Weerasinghe said things would get worse before they get better. But the question remains what more people could endure, as they already undergo a nightmarish experience in their day-to-day affairs. 

Corrupt bureaucrats and opportunistic politicians, who ruled the country since its independence in 1948, are equally responsible for the current economic implosion and they must be held accountable for their misdeeds forthwith to ensure Sri Lanka has a durable economic well-being, as any vestiges of the corrupt lot will come back haunting any future progresses made. 

Sri Lankans, in one voice, are calling for a new breed of politicians, as they daily protest against the current lot in Parliament.