First Capital positive of SL achieving private credit target this year despite virus setback

First Capital Research (FCR) expressed optimism that Sri Lanka would hit its year-end target set for private sector credit in 2021, despite the temporary setback during the second quarter, which stemmed from the myopic restrictions imposed by the government to control the spreading of COVID-19.

According to a new report, FCR researchers indicated they were unperturbed by the recent deceleration in the growth in the credit disbursed to the private sector as the country had already achieved 44 percent of its yearend target during the first five months. According to the first five months private sector credit data, Sri Lanka’s licensed commercial banks had granted Rs.330 billion in fresh credit to the private sector, out of Rs.750 billion earmarked for the full year, although the pace at which the credit grew decelerated by half during April and May.

June credit growth is expected to be much slower as much of it remained under lockdowns, while banks also closed down their operations briefly.

The Central Bank in May cut down its private sector credit growth target from 14 percent to 12 percent.

“Decade low interest rates may accelerate private sector credit growth to 12 percent in 2021E and 2022E,” FCR said in a report issued last week.

The resilience in private sector credit signals how robust the other sectors of the economy such as investments, business and consumption activities could expand, or hold up at a minimum.

Low interest rates continue to remain the biggest catalyst for the continuous demand for credit, and the research house recently said that the upward pressure seen on the rates could ease for sometime as the economy beset by the pandemic would require additional monetary support while the cashstrapped government would require more liquidity, which comes by way of printed money.

Meanwhile, FCR said the pressure on bond yields could mount from the second half of the year due to the revival in private credit and rising government borrowings.

“Bond yield stands to increase by 50 basis points for the 2H2021E amidst debt pressure and private credit”, they said last week.

The Central Bank has a difficult balance to maintain as interest rates cannot be too low, risking a overheating of the economy, and they also cannot be too high risking a slowdown in the economy.