Sri Lanka ends 2021 with Rs.810bn in private credit

• Well within CB’s original target of 12-14%credit growth 
• Dec. 2021 private credit at Rs.61.3bn; private credit in 2020 was Rs.400bn
• Higher credit growth directly supported by historically low interest rates

Sri Lanka’s commercial banks gave a record amount of credit to the private sector in 2021, defying the impact of the pandemic and its related vagaries on the broader economy, albeit the growth in the second half of the year somewhat eased compared to the first half.

According to the latest data released by the Central Bank, commercial lenders had given a cumulative Rs.810.5 billion in fresh credit to private individuals and businesses with the December credit coming in at Rs.61.3 billion, roughly the same amount of credit given in November.

The cumulative credit growth translated into a robust 13.1 percent growth in 2021 and fell in line with the Central Bank’s original target of 12 to 14 percent credit growth over
2020 levels.

The latest numbers were an indication that the economy had begun humming once again as credit markets provide a fine barometer of the health of the economy, although the foreign exchange crunch and the inflation have somewhat taken shine away from it.

The 2021 private credit was more than twice the amount of credit licensed banks gave in 2020. In 2020, the banks gave out Rs.399.9 billion in new loans, with just 6.9 percent growth in total outstanding private sector loans.
The strong credit data mirrors the equally robust performance of the banking sector in the year 2021, which is reflected by their interim financial accounts released to the Colombo Stock Exchange.

The virus flare-ups from April onwards derailed the solid pick-up in credit, which otherwise would have ended up with over a trillion rupees in new loans. The higher credit growth in 2021 was directly supported by historically low interest rates. 

While the fresh credit helped assisting many individuals and businesses to blunt the virus impact on their livelihoods and cash flows, it also contributed towards creating the prevailing foreign exchange crunch and the higher consumer 
prices.

As a result, the Central Bank has twice raised its benchmark rates by 50 basis points each in August and January to somewhat cool down the credit markets, which in turn will help ease inflation and restrain foreign exchange outflows.

Sri Lanka’s merchandise import expenditure rose to the highest levels since 2018 while big corporates reported record profits amid a languishing economy, reflecting the anomalous nature of the economy.