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The Sundaytimes Sri Lanka

Banks eye commercial not consumer loans

By Sunimalee Dias
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A Central Bank (CB) policy decision to limit loans this year has had a direct impact on the people though the economy is expected to, overall, benefit from the move.Banks have prioritized their banking operations following this decision, which some believe has caused them to reduce their lending capacity.

“Our original intention was to go beyond the limit,” Sampath Bank Managing Director Aravinda Perera told the Business Times.
He said previously they were looking at achieving 27-30% (loan growth) however, with the restriction in place they had to bring it down to 23%.This has forced banks to prioritize among customers when lending with most eyeing SMEs, development based projects and import-export businesses while reducing consumer loans.

The CB in February directed commercial banks to “moderate” credit disbursements to not exceed 18% of their respective loan book outstanding at the end of 2011, while credit growth of up to 23% would be allowed for those banks, which finance the excess up to 5% of the credit growth, from funds mobilized from overseas. Mr. Perera said they believed that commercial projects would attract more lending than personal loans.

“We have a limit and we have to select the best lending opportunities both for the bank and the country,” he said.
In this regard, banks were saying no to non essential personal loans while indicating interest to provide loans for commercial projects.
The bank believes they would be going in for more dollar loans than rupee loans in order to increase their lending. However, even in this regard, they were limited, he pointed out adding that interest rates once stabilized would allow the CB to relax this policy at least in certain sectors.

On the other hand, the Commercial Bank had braced itself for a 23% loan growth even prior to the announcement, its CFO Nandika Buddhipala said. With the bank sitting on liquidity towards last year, it was believed that the credit expansion in the last quarter of 2011 would not hold well with the market to increase its lending.

Mr. Buddhipala opines that this policy was a “signal to the market by the Treasury that credit growth is high and that we need to watch the situation.” Prioritization in terms of granting loans at Commercial Bank are based on a risk-return basis as a result consumption loans and import oriented consumption loans are considered “vulnerable.” Here too the SMEs were looked at positively as “we feel there would be income generation” and it will have an impact on employment.

Reacting to concerns that people were finding it difficult to obtain loans, the CFO said, “We need to positively look at the production side of it” adding that any loan making a positive contribution to the growth of the economy should not be curtailed. In this regard, he said production needs to pick up in the country for savings to increase.

Another banker observed that while this was a policy decision it would impact on the bank in different ways but pointed out that they needed to adopt this for the “sake of the economy.”Almost all hoped this would not be continued and was likely to stay for only a year as stated by the CB whose Governor Ajith Nivard Cabraal told the Business Times this week that while this was “deliberately done,” it was necessary to curb the increasing inflation.

But pointed out that since 18% was a large amount, it was “good enough” for all to be provided loans noting that customer credit is allowed a sufficient amount.

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