Private sector credit growth loses steam; State steps up borrowings

• Bank credit to private sector slows to Rs.46bn in Aug. from Rs.82.6bn in June
• Net credit to government up by Rs.46bn in August; credit to public corporations increases by Rs.3bn
• Overall bank credit in economy up by Rs.98bn from Rs.86bn in July

Credit to the private sector in August has eased from a month ago although the overall bank credit stayed high as the cash-strapped government as of late was seen stepping up borrowings from the banking sector.

According to the latest Central Bank data, the banks have granted Rs.46 billion in credit to private sector individuals and corporation for consumption and investment purposes in August, a notable moderation from Rs.82.6 billion in June. On a year-on-year (YoY) basis, the growth in private credit decelerated to 14.3 percent in August from 14.7 percent in July, where credit grew by a similar amount to that of August. 

Loans to the private sector have been easing since July in response to weak consumer and investment sentiments. 

The banks have also turned cautious in granting new facilities after their non-performing loans hit multi-year highs leading to higher credit costs as the economy lost steam amid tight policies. 

The banking sector non-performing loans fell to a fresh low of 3.6 percent in August from 3.4 percent in July. 

Meanwhile, the recent credit numbers reflect that the YoY growth in private credit is nearing the Central Bank’s projected growth rate of 13-14 percent in 2018 with an increase of Rs.648 billion in new credit. 

However, the August private credit numbers reflected another phenomenon, where the government was seen stepping up its borrowings from the banking sector. The net credit to the government rose by Rs.46 billion in August after contracting by a similar amount in July. 

Meanwhile, credit to the public corporations rose by Rs.3.0 billion in August. Last week Mirror Business reported that the overall bank credit in the economy had grown by Rs.98 billion from Rs. 86 billion in July. 

The Monetary Board last week kept its benchmark rates unchanged at its October meeting citing the deceleration in private credit among others, as a key reason for the decisions.   

 “Credit extended to the private sector continued to decelerate buttressing the moderation of broad money growth in August 2018. 

These trends in monetary and credit expansion indicate greater monetary stability, which is consistent with the envisaged medium term growth path of the economy. Moreover, based on the data up to the first half of 2018, credit to all major sectors of the economy has expanded, indicating the availability of adequate financial resources to support economic activity”, the statement issued by the Monetary Board said.