Private credit records Rs.70bn negative growth in month of May

• Credit to govt. spikes to Rs.164bn
• Credit to public corporations up by Rs.18.6bn

Total credit to private individuals and businesses by the banking sector declined by Rs.69.6 billion in May as loan settlements by borrowers who were capable of continuing to service their loans overtook the new loans granted in the month where not much new economic activity happened. 

Sri Lanka’s private sector credit cratered in April to little over Rs.13 billion from Rs.120 billion in March, when the economy, which was on a rapid upward trajectory during the first two months and half was grounded to a halt by the COVID-19-induced lockdowns.

Sri Lanka returned to semi-normalcy from mid-May with the gradual easing of lockdowns. But many activities, which required personal contact, were either continued to be on hold or performed under strict health guidelines. 
People and corporates deferred their purchases of high value items and large investments, and instead conserved cash mostly in bank accounts until the path becomes clearer with the gradual dissipating of virus fears. 

This has dampened any prospects for new loans by the private sector in May when a lot of businesses were operating at half of their usual capacity and their workers mostly stayed at homes.

When the future looks bleak, people and companies tend not to take on new debt because slowing income reduces their ability to service loans. 

However, the situation in June could be different with debt becoming more affordable and plenty due to the concessional loan schemes introduced by the authorities. Also, May PMI data indicated a recovery in both manufacturing and services activities.

Meanwhile, when the private sector was sheltering-in-place, the government stepped up its role in the economy as it borrowed a whopping Rs.164.3 billion in May from the banking sector, up from Rs.65 billion in April. 

The government provided economic stimulus in April and May by distributing cash to those who lost their livelihoods and to those who became vulnerable due to the lockdowns, while powering the essential services and spending heavily on containment efforts of the virus.  

Credit to public corporations increased by Rs.18.6 billion in May, declining from Rs.66 billion in April. 

The money supply measured by the broad money or M2b expanded by 13.7 percent in May from a year ago, accelerating from 13.2 percent expansion recorded in April, indicating that government borrowings taken to spent on the economy have more than offset the decline in the private credit and have been able to put cash in the hands of the people.