Private credit loses momentum in January

Sri Lanka’s bank credit extended to the private sector has fallen in January by Rs.4.3 billion, recording a reversal roughly in five years, as the higher credit costs and weakening asset quality left the lenders at bay while the borrowers postponed new borrowings as rates remained too high. 

According to the latest monetary sector data released by the Central Bank, Sri Lanka’s overall monetary expansion has become more skewed towards contraction as the Monetary Board continued to remain hawkish.

The overall money supply measured by broad money or M2b has decelerated to 11.5 percent in January on a year-on-year basis from 13 percent in 
December 2018. 

The contraction in the private sector credit has put the total outstanding credit to the private sector at Rs.5,556.7 billion by end-January 2019, compared to Rs.5,561 billion a month ago. 

The pace of the growth in private sector is an overt gauge of strength of an economy as this demonstrates the amount of money borrowed by businesses of all scales and individuals for their investments and consumption activities, which in turn indicate how vibrant an economy is. 

In other words, the pace of credit demonstrates the confidence placed on an economy by various economic actors such as consumers and investors, which is referred to as animal spirits by the British economist John Maynard Keynes in his famous 1936 book ‘The General Theory of Employment, Interest and Money’.  
Hence, a contraction in private sector credit is a reflection of weak animal spirits, where the people in an economy have virtually gone dormant losing their trust and confidence in the system. 

However, January is typically a slow month when it comes to new lending, the banking sector data shows. Sri Lanka’s monetary policy has been tight since 2016 after a credit bubble that burst in that year. 

During this period, the rupee collapsed from Rs.133 to Rs.180 against the US dollar as the Central Bank printed billions of rupees to keep the exchange rate artificially low.

Printed money caused a spurt in credit fuelling imports, which put pressure on the currency as Sri Lanka imports double the exports.

Meanwhile, the banks are now taking extra precautions to lend to new borrowers as they burned their fingers during the preceding years as they were forced to write off billions in loan values as impairments. 

Banking sector credit quality faltered notably in 2018 calling for additional risk management measures.

Meanwhile, credit to the public corporations recorded a decrease of Rs.44.3 billion in January. 

The net credit to the government from the banking system showed an increase of Rs.110.2 billion.

Sri Lanka’s banks in 2018 gave Rs.739 billion in credit to private individuals and businesses, recording a 15.3 percent increase.