Private sector credit surge in Sept.; state credit follows suit

• Banks loan Rs.107.3bn in new credit in Sept., up 15.6% YoY
• CB terms development “possibly short-lived acceleration”
• Expects private credit to return to envisaged level of about 13.5% by end of year
• Credit to govt. up by Rs.155bn; to public corporations up by Rs.17bn

The credit granted to the private sector by the banks has surged while the credit to the government and public corporations followed suit, as the Central Bank printed money to keep the interest rates low in September. 

The banks in September gave a whopping Rs.107.3 billion in new credit to private individuals and businesses recording an increase of 15.6 percent over the same month in 2017. 

This is a substantial increase from a just Rs.46 billion or 14.3 percent year-on-year (YoY) growth in private credit in August. 

However, the Central Bank said the spike in private credit in September is “possibly short-lived acceleration”, as “businesses advanced borrowings in anticipation of measures to curb excessive spending on imports”. 

The Central Bank also said a notable growth in advances was seen in the personal loans category, which has risen by 17.3 percent during the July-September quarter, from the same quarter, last year. 

However, the Central Bank did not view the development as a reason to panic, as the monetary authority is of the belief that the private credit growth will return to the envisaged level of growth of about 13.5 percent by the end of the year. 

“It is expected that the private sector credit growth would return to the envisaged path as measures taken by the government and the Central Bank gain traction,” a presentation made by the Central Bank’s Economic Research Department said. 

The measures taken to tighten the monetary policy and the fiscal discipline shown by the government tamed the growth in private sector credit, which had been rising at over 20 percent since 2015. 

Despite the surge in the private sector credit the money supply measured by broad money or M2b has further decelerated to 13.1 percent in September, from 13.5 percent in August on a YoY basis. 

Inflation has also remained benign mostly due to lower food prices as the prices measured by the Colombo Consumer Price Index rose by 3.1 percent in October from a year ago, down from 4.3 percent in September. 

The Monetary Board last week left its monetary policy on a neutral stance as it reduced the banks’ reserve ratio by 150 basis points, while raising the Statutory Lending Facility Rate by 50 basis points and Statutory Deposit Facility Rate by 75 basis points, to leave each at 9.00 percent and 8.00 percent, respectively. 

Meanwhile, the net credit to the government also rose substantially by Rs.155 billion during September, while the credit to public corporations too rose by Rs.17 billion. 

With the ongoing power struggle, it is expected that the country’s fiscal discipline is to go haywire, nudging the domestic interest rates upwards and expanding the borrowings by the state and state-owned enterprises.