Lankan credit disbursements still low; bankers say demand for consumer items easing
View(s):Despite probably the lowest interest rates in recent times, credit disbursement by Sri Lankan commercial banks has been declining over the past few months, the Central Bank (CB) said this week in releasing its report for monetary policy in June.
There has been a steady decline in lending by both state and private banks which bankers said is due to a lack of consumerism which in turn has led to private companies being reluctant to take out new loans, increase credit limits or overdrafts.
The CB said net credit to the government contracted by around Rs. 11.5 billion during the month while credit to public corporations also recorded a marginal decrease, both of which were cited as positive developments.
“Nevertheless, lower credit disbursements to the private sector by commercial banks along with the decline in pawning advances resulted in a deceleration of the growth of private sector credit by the banking sector to 2.2 per cent (y-o-y) in May,” it said, adding: “As markets remained sufficiently liquid, the continued moderation of growth of credit to the private sector is deemed temporary in view of gradually adjusting bank lending rates. At the same time, given the continued low inflation environment, the Central Bank would continue to encourage the banks to utilise the available space to reduce market lending rates further while tightening their spreads to provide further stimulus to the private sector to demand credit from the banks”.
The report said the low inflation environment continued with year-on-year inflation remaining benign in June recording its lowest level since February 2012, while the annual average inflation has trended downwards. Headline inflation (y-o-y) for June recorded 2.8 per cent from 3.2 per cent in the previous month, while core inflation remained low at 3.5 per cent in June, although marginally higher than 3.3 per cent in May.
Prices of some items in the food category increased, but the base effect and the decline in non-food prices have contributed to the low inflation.
Looking ahead, the CB said year-on-year inflation is expected to remain comfortably within mid-single digit levels during the remainder of the year in spite of weather related variations in agricultural produce. “The Central Bank has noted with satisfaction, the recent steps adopted by several bank and non-bank financial institutions supervised by the Central Bank, to introduce a number of investment instruments providing long term benefits aimed at senior citizens who rely on interest income. Such innovative financial products and schemes would provide the essential comfort to this segment of the population in a sustained low inflation environment.
At the meeting held on 11th July 2014, the Monetary Board also noted the ongoing downward adjustments in market lending rates, which would result in the expected benefits of low cost of finance being fully transmitted to productive sectors of the economy,” it said.
Given these developments, the Monetary Board of the CB decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at their current levels of 6.50 per cent and 8 per cent, respectively.