Private sector credit spikes in August to highest monthly figure after many years

• Private credit expands by Rs.134bn recording 15% growth
• Could be a result of parties locking in funds before further rise in interest rates

Banks kept their lending taps wide open during August, making the most amount of credit to the private sector in a single month in years in a possible sign that businesses and people raced to borrow to lock in low cost funds when the rates were still at their lowest before things could start going the other way as the Central Bank is gearing to end the pandemic era policy support. 

In August, licensed commercial banks extended their total outstanding private sector credit by a staggering Rs.134.1 billion, the highest in many years and more than the Rs.112.2 billion in March, the previous highest this year when the economy was off to a fine start in the first quarter of the year before the virus returned to blunt the momentum. 

The August private credit marked a growth of robust 15.1 percent in the year to August 2021, accelerating from 14.3 percent in August and now runs well ahead of the Central Bank’s target range of 12 to 14 percent projected for 2021. 

The August private credit could either be an indication that the market participants smelled the era of ultra low interest rates was to come to an end soon or they went along with their borrowing binge at the height of euphoria that lasted for two months since the economy reopened on June 20 after a month long lockdown which created an economic gloom. 

The August spike in credit to the private sector could also be a reflection that the market was broadly willing to shrug off the rate hike for want of the access to liquidity in these challenging times to support recovery, add more capacity and advance growth. 

The August data on private sector credit also underscores the sentiments the Central Bank expressed over the credit flows when they raised key interest rates on August 19.

 “The momentum of credit expansion is expected to continue in the period ahead,  with increased credit flows to productive and needy sectors of the economy”, the Central Bank said when raising rates. 

The August credit to the private sector puts the first eight months cumulative credit at Rs.625.1 billion, well within the range of Rs.850 billion originally targeted for the full year. 

The average weekly prime-lending rate rose by 29 basis points last week, bringing the total increase in the benchmark rate to a full percentage point since August 19 to 6.71 percent. 

While the full effects of the August 19 rate hike on private sector credit could only be seen during the coming months, it is unlikely to have a big impact on the pace of the credit flows as there is still a lot more appetite for credit from the private sector which could not realise their full potential this year due to the resurgence of the virus. 

While some economists point out the need to further hike in interest rates to arrest the anomalies in the external and monetary sectors, it must be done very carefully as overdoing interest rate adjustments could well derail business and economic recovery which requires further support.