Private sector credit contraction deepens in December

• Private credit plunges Rs.72.6bn in December, accelerating from the Rs. 30.9bn decline seen in November

The contraction in the credit extended to private sector borrowers from commercial banks deepened in December 2022, extending the streak of declines for the eighth consecutive month, reflecting the level to which banks have tightened their credit standards and borrowers have pulled back on fresh borrowings amid the restrictively high interest rates. 

The data showed that private credit plunged Rs.72.6 billion in December, accelerating from the Rs. 30.9 billion decline seen in November. 
The current cycle of credit contraction began in May last year when the bumper policy rate hike in April by the Central Bank to tame inflationary pressures that started sending shock waves through credit markets and all throughout the economy. 

Banks grew skittish over extending loans and thus tightening their credit standards to limit the impact from large scale defaults while borrowers waited in the sidelines as borrowings made no longer sense at the prevailing rates. 
With the December data, the total outstanding private credit in the commercial banking system was Rs.7, 426.6 billion by the end of 2022, compared to Rs.6, 981.4 billion a year ago. 
This still reflected 6.4 percent uptick solely caused by the sharp rupee devaluation from March through May which inflated the domestic credit in rupee terms during the period. 
Economy is currently witnessing a slight easing in financial conditions after the relative improvement in liquidity conditions in the interbank market in January following Central Bank intervention. 

The gradual improvement seen in foreign currency liquidity in the banking system has also eased up the financial conditions a bit compared to a few months ago as the Central Bank has been managing outflows with limited inflows that the country receives. 
The debt standstill which was announced in April 2022 also helped the country saving at least an outflow of US$ 6 billion.

Private credit is an important economic barometer which shows whether the economic actors are willing to spend on investments and consumption. 
The continuous decline corresponds with the worst decline in the economy witnessed in 2022, which is estimated to have contracted by at least 8 percent. 
While the economy will continue to decline in 2023, though modestly than last year, banks are expecting a moderate growth with the easing of financial conditions on the back of a US$ 2.9 billion International Monetary Fund bailout package expected in the first half.