April private credit slips temporary due to extended holidays

Outstanding credit to the private sector by the licensed commercial banks slipped in April after months-long growth in another idiosyncrasy which cannot be described by the current recovery and growth in the economy that is running at a relatively faster pace.
The data showed that the outstanding credit to private individuals and businesses declined by Rs.16.2 billion in April from the levels in March.

The only explanation that could provide for the decline was the usually longer holiday season in April where the business activities slowed down temporarily.
The slowdown was seen from the other economic indicators which were released prior to the private credit data such as the manufacturing and services sector Purchasing Managers’ Index (PMI) and the construction sector PMI.

Despite the temporary decline in the credit to the private sector in April in nominal terms, it still translated into a 4.1 percent growth on a year-on-year basis, accelerating from 3.6 percent from March.
And also the decline in credit also doesn’t mean that the banks haven’t granted any credit during April, rather it means that the credit settlements which came up in April had outstripped the fresh credit granted.

The Central Bank however left the policy rates unchanged on May 20 as lending rates were responding fast to the previous policy rate cuts and said it was just a matter of time before the credit starts picking up meaningfully.
They said while the small businesses have begun taking new loans, they are still mostly for their recovery from the downturn seen during the last two years.

But said that no sooner they shift gears from recovery into growth and expansion, then they will need money to power such growth which will then be reflected in the headline private sector credit numbers.
The prime lending rate, the benchmark rate used by the banks to lend to their most credible clients for very short term, often less than three months, fell by another 8 basis points to 9.28 percent.

The small business loan rates now hover around 12.5 percent, which is very attractive.
Further current lending rates also remain healthy for both sides – banks as well as the borrowers.
Hence some analysts caution the Central Bank against any more cuts in policy rates, as pushing down the lending rates further could narrow interest margins more while attracting less creditworthy clientele to the banks.