Research firm forecasts private credit to fall below 10% by 2017

„Slower consumption and expensive credit to take toll „Commission and fee income to slow with weakening economy „But better margins will support bottom line „Construction and higher incomes to buttress mediumterm growth

Sri Lanka’s private sector credit, which peaked in 2015, is expected to take a nosedive to 9 percent in 2017 before recovering to 18 percent a year after, due to the slowdown in consumption resulting from higher inflation and expensive bank credit, according to an independent research house.

The last time the private credit growth fell below 10 percent was in 2013 (7.5 percent) when the country was forced to tighten the fiscal and monetary policies, when the country was recovering from a balance of payment crisis.

Sri Lanka’s private credit, which hit a record high of 25 percent growth in 2015 from a year ago, showed little response to the beginning of the year monetary tightening measures, as the credit grew by strong 21 percent year-onyear (YOY) during the first quarter in 2016.

Capital Alliance Research (CAL Research) estimates a slowdown during the second half of the year (2H16) due to the same reasons and will end the year with a 19 percent YOY growth – much higher than the Central Bank’s expected credit expansion rate of 15 percent for 2016.

Despite the 1.5-basis point hike in the statutory reserve ratio (SRR) this January and the subsequent increase in the key policy rates in February, the Monetary Board hadn’t been able to tame the monetary expansion as the banks had extended as much as Rs.86.4 billion credit to the private sector in March, recording a 27.7 percent YOY growth. MORE ON P6

“Private credit growth is a Central Banker’s nightmare,” Central Bank Governor Arjuna Mahendran told a forum a few weeks ago.

According to CAL’S banking sector report, 2016 to 2018 private credit will be driven largely by the small and medium enterprise and corporate sectors, which are estimated to grow by 21 percent and 20 percent, respectively, as those firms will require to fill up the working capital needs.

The policy uncertainty, inconsistent taxes and the fear over new taxes, such as the capital gains tax, could weigh on the future investments by the private sector during the remainder of the year.

However, this medium-term growth of the banks is expected to be supported by the infrastructure-led construction and growth in disposable incomes, which are estimated to grow by 18 percent and 13 percent compound annual growth rate through 2018, respectively.

The unity government pins hope in public-private partnerships (PPPS) to revive some of the loss-making state-owned business enterprises and kick start mega infrastructure development projects such as the Western Region Megapolis Planning Project – a US $ 40 billion project.

Meanwhile, the microfinance segment is also expected to record above average growth in all three years but the sector’s contribution to the total industry loans would remain at 0.9 percent in 2016, CAL stated.

Despite the market developments have thrown challenges to the banks to expand their wings, CAL is of the belief the sector margins to grow as a result of upward revision in both assets and liabilities portfolios.

“In 2016, CAL expects yields on earning assets to rise faster than cost of funds due to faster asset re-pricing, resulting in a 20-basis point improvement in net interest margins,” the report added.

CAL also expects the commission income growth to slow down due to expected weakening of economic activity.