Private credit surges, signalling onset of new credit cycle

• In November, licensed commercial banks extended a net credit of Rs.63bn to private individuals and businesses 

Sri Lanka seems to be embarking on a new credit cycle, following almost two years of contraction, as the commercial banks are signalling their preparedness to resume robust lending, aligning with the improving financial conditions.
The provisional data from the Central Bank showed that the commercial banks had collectively extended their outstanding private sector credit by relatively robust Rs.63.0 billion in November, picking up from a Rs.37.9 billion growth 
in October.  

November also marks the sixth consecutive month of growth in credit to the private sector, after turning around in June, although the amount of credit that was given out every month since then took an 
erratic pattern.  
The banks gave out Rs.75.0 billion, Rs.13.0 billion, Rs.6.0 billion and Rs.70.0 billion, respectively in June, July, August and September, bringing the total outstanding credit to Rs.7,268.9 billion by 
end-November.
Despite November marking somewhat a solid growth in credit in absolute terms, this was still 3.1 percent lower from a year ago period, on a relative basis.This is because the outstanding credit by end-November 2022 stood at Rs.7,499.22 billion, higher than what it is now, reflecting still more ground to cover, to return to the levels prior to the crisis.

Over the past two years, the banks experienced a contraction in their loan books and balance sheets. This was primarily a result of virtually halting lending activities, driven by both soaring interest rates and increasing defaults. The economic crisis led to a significant deterioration in borrowers’ credit profiles, with businesses closing and millions facing income loss.
However, as the data suggests that the worst appears to be mostly behind the economy, the Central Bank a few weeks ago said it expects an expansionary credit cycle in the period ahead, supported by the easing lending rates and credit quality issues turning a corner.   
“Reflecting the early impact of monetary policy easing, the private sector credit-to-GDP gap (the credit gap), which reflects the status of the credit cycle, signals that the trough of the cycle had passed and the cycle has entered the recovery phase,” the Central Bank said in its Financial System Stability Review for 2023, released in the final days of December.
Credit to the private sector is an important barometer of the economic health, as its direction and the pace reflect if and by how much the people and businesses borrow for their consumption and investment needs, helping to quicken the economic recovery.