Central Bank to spoil bankers’ party?

Sri Lanka’s banks may be operating with fancy projected numbers to grow their loan books during 2017 but the country’s Central Bank seems to be standing firm on their way to crush those expectations as cheaper credit always tends to destabilise the importdriven island economy.

Sri Lanka’s private sector credit growth in January 2017 decelerated to 20.9 percent year-on-year (YOY) from 21.9 percent in 2016 with the credit disbursed during the month sharply falling to Rs.18.7 billion from about Rs.70 billion a month on average during the second half of 2016. But the Central Bank appears to be not content, meaning the monetary authority wants further restraints on the pace of credit growth.

Hence, the healthy level of private sector credit growth for 2017 is not more than 15 percent, Central Bank Governor Dr. Indrajit Coomaraswamy said, adding that there is an uptick during the month of February, which might have caused some concerns for the Monetary Board when they met for the second time for the year to decide on the key rates, last week.

The Central Bank last week raised its key policy rates by 25 basis points as the credit growth had remained higher than what the Central Bank would have expected it to be. Dr. Coomaraswamy said the private sector credit growth had not come down as expected.

The news may not be welcoming for most bankers who want to appease their shareholders with higher earnings recording around 17-20 percent and even close to 30 percent growth levels in their loan books for this year, information obtained by Mirror Business from some of the lenders showed.

It was only recently Hatton National Bank PLC, Sri Lanka’s second largest private lender by assets, said it wants to grow its loans by 17-18 percent— which would be slightly over Rs.100 billion— for 2017. Private credit is only part of the problem which causes monetary expansion because the credit to the public sector has contributed much to the expansion of the monetary base, causing constant worries for the Central Bank.

“The deceleration in monetary and credit aggregates has been slower than expected,” the Central Bank said.

According to the data, Sri Lanka’s credit to the state from the banking system has surged to Rs.141 billion in January 2017, rising from Rs.121 billion in the corresponding month in 2016.

Meanwhile, the credit to the stateowned enterprises (SOES) in January 2017 was Rs.23 billion after lending Rs.26 billion in December 2016.

As a result, “YOY broad money (M2b) growth remained high at 17.7 percent in January 2017, although this was a deceleration compared to 18.4 percent in December 2016,” the Central Bank said.

The private credit growth is a Central Banker’s nightmare because more of this would overheat the economy while less of this would slow down the economy hurting the growth.

Despite multiple rounds of monetary tightening measures, since December 2015 the Central Bank holds on to its original growth projection of 5-5.5 percent growth for 2017.

Dr. Coomaraswamy said there is lot more optimism about the global economy now than a couple of months ago to hold this view and also said there is enough space for the economy record over 5.0 percent growth this year.