Private sector credit accelerates in December after brief slowdown

• Dec. private sector credit at Rs.76.7bn, up from Rs.41.4bn in Nov.
• Total private sector credit at Rs.374bn in 2020

The private sector credit gained pace during December after a brief deceleration in October and November, indicating that private individuals and companies have resumed taking up loans for consumption, production and investment activities. 

According to the latest data, licensed commercial banks have disbursed Rs.76.7 billion in net credit to private individuals and companies in December, accelerating from Rs.41.4 billion in November and Rs.59 billion in October. 

The pickup in pace in private sector credit is an indication that banks are churning out applications for loans at a faster pace as the appetite for loans is growing sharply with interest rates at historically low levels. 

With the December figure, the licensed commercial banking sector now has Rs.6,170.9 billion outstanding, up by 6.5 percent from a year ago. This translates into Rs.374 billion in total private sector credit during 2020. 

The Central Bank expects private sector credit to expand by 14 percent in 2021 and by at least 12 percent thereafter every year into the medium-term. The Monetary Board in January decided to keep policy interest rates at current levels after five rounds of easing in 2020 as they were of the view that the earlier policy measures still had more room to run their course. 

New loans at or below 10 percent quadrupled last year to about 85 percent of all new loans granted in that year marking a significant feat in the country’s financial system as there has not been a time when such a magnitude of loans at single digits interest rates were granted in the Sri Lankan history. 

The pandemic and its fallout opened up a new era in the Sri Lankan financial sector as lower interest rates are now becoming a possibility for a prolonged period ahead. 

An economic environment characterised by the trinity—low interest rates, low inflation, and low taxes—has now become a reality and it can restart a virtuous economic cycle for investments, production and personal incomes.