New loan growth picks up in July

„Banking sector credit growth accelerates to 15.6% YOY in July reaching Rs.79 bn „Non-performing loans exceed 3-year highs „Pawning and credit cards lead credit growth

Growth in new loans by Sri Lankan banks accelerated pace during July from a month ago as the lenders try to beat to odds of the tight economy to meet their internal growth targets during the second half of the year.

Sri Lankan banks granted a total of Rs.79 billion in new loans to the private sector, government and state-owned enterprises combined during July, posting a growth of 15.6 percent over the same month in 2017, accelerating from the 14.7 percent growth recorded in June.

However, in absolute terms, the total bank credit granted in July was lower than the Rs.95 billion in June. Even July’s loan growth is below that of the excessively high growths in bank credit reported during the three years from 2015. `

In 2015, new loan growth in the banking sector reached a 21.1 percent after the Central Bank relaxed monetary policy to stimulate the economy.

As the economy ran into a balance of payment crisis in the following year, due to an unsustainable level of credit, the growth in new loans came down to 17.5 percent and 16.1 percent in 2017, as the Central Bank started raising the benchmark rates and imposed macroprudential measures to curb excessive monetary expansion.

After three years of high growth in the loans, Sri Lankan banks now face a moment of truth as the growth has decelerated and the asset quality has waned as people and businesses struggle to service their facilities due to higher borrowing costs. As banks do damage control, banks practice caution in granting new facilities and exercise intense credit controls to keep the nonperforming loans in check, which rose to over three-year highs of 3.4 percent in July.

Meanwhile, among the category of loans, pawning and credit cards are at the forefront in highest rates of growths while leasing is also on the up. After a long hiatus, pawning facilities are growing at 15 percent while the credit cards are also growing at over 20 percent over the same period last year.

Leasing has been growing at just over 10 percent but new excise duties imposed in August could hamper the growth although the bank have so far not felt any tangible impact from the tax hike. The growth in housing loans has trended down to about 7.5 percent year-on-year in July.

Meanwhile, out of the total outstanding loans and advances in the banking sector, consumption-related loans have the highest exposure of just shy of 20 percent followed by wholesale and retail trade with 16 percent and construction loans with 14 percent share by the end of the first half of 2018.