Pvt. sector credit gathered steam in March as economy was poised for growth

• Over Rs.120bn extended in private credit in March recording 6.4% YoY growth

Credit extended by banks to the private sector gathered steam in March after making early gains in February, showing initial signs that the Sri Lankan economy was off to a robust recovery after years of stagnation before being struck by the China originated virus.

According to the latest Central Bank data, Sri Lanka’s banks have extended Rs.120.1 billion in private credit recording an year-on-year growth of 6.4 percent, nearly five times the amount in February, in a clear indication that the tax cuts in December and the lower interest rates were effective in rekindling the economy. During February, private sector credit grew by 4.6 percent or Rs.25.3 billion, accelerating from 4.3 percent in January. 

Among others, private sector credit is a key indicator of the broader sentiments of the economy by every economic actor— consumers, investors and businesses.   

Many balked at the broad set of tax cuts when they were initially announced, rushing to identify them as a wasteful election gimmick and warned of dire consequences of bloated fiscal deficits, with scant regard to what such could have on businesses and consumers who were mostly inactive after being slapped with various taxes.

Fitch Ratings cut Sri Lanka’s sovereign rating outlook to ‘Negative’ from ‘Stable’ on concerns of reversal of fiscal policy trajectory. What added to those fears was the foreign debt refinancing risks.  

The stronger private sector credit deployment in March mirrors the loan growth numbers coming out by individual banks pointing towards a gradual upsurge in borrowers’ activity since January 2020. 

For instance, Commercial Bank had a loan growth of just about Rs.30 billion for the three months while Sampath Bank had its growth at Rs.25 billion for the same period, both projecting to end up with well over Rs.100 billion in new loans for the year if not for the virus.

Meanwhile, many banks reported a jump in their bottom lines purely from lower taxes during the period ended March 2020 although their operating results were affected by heavy credit costs stemming from coronavirus related business impact.  

Private sector credit, which at the start of the year appeared to have the potential to grow by around 15 percent for the year, after coming in at a very low of 4.5 percent in 2019, is now projected to grow by around 6 percent, according to First Capital Research. 

At a meeting held last week, the government has requested the banks to provide concessionary rate loans to identified sectors such as plantations, small and medium enterprise manufacturing, housing and construction and value addition to agri-based produce. 

State lenders already have introduced many subsidised loan schemes targeting agriculture and plantation sectors. 

Besides, the banks have become partners to deploy Rs.50 billion refinance credit scheme made available by the Central Bank for eligible borrowers to overcome their urgent financing requirements caused by the interruptions to their businesses from the new coronavirus induced shutdowns.

There is a potential that the Central Bank could come up with a similar or higher refinance scheme. 

Further, the Monetary Board has cut its key policy rates four times so far this year by as much as 150 basis points, eased capital requirements and allowed banks to draw down from the capital conservation buffer among others with the expectation of passing the benefits to borrowers via lower interest rates and ramping up lending. 

Meanwhile, in other credit, banks gave Rs.35.7 billion in fresh credit to public corporations in March, up from Rs.12.6 billion in February. 

Further, the net credit to government by the banking system surged to Rs.270.4 billion in March from Rs.41.9 billion in February as government raised money via government securities, mainly to combat the new coronavirus.  

Meanwhile, the money supply measured by broad money (M2b) expanded by 11.6 percent on a year-on-year basis in March, up from 8.4 percent in February, an indication that the credit to both the private and public sector was improving the money in circulation in the economy. 

However, the country is yet to see if the strong rebound, which was on the works in the first quarter seen from the credit numbers, would be reflected in the first quarter GDP data, although the lockdowns went into effect from mid-March.