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- Credit to the private sector increased by just Rs 2 billion in May
- If not for the impact of the rupee depreciation, private credit may have contracted
- Banks fear a wave of defaults that could deal a huge blow to their asset quality
- SL inflation exceeded 50% for the first time in May; food inflation jumps to 80%
Banks effectively stopped lending to private borrowers as interest rates rose into restrictive territory and economic conditions turned from bad to worse, prompting them to tighten lending conditions to prevent further damage to the quality of your assets.
Meanwhile, demand for credit also fell sharply after banks quickly followed suit as the Central Bank raised key interest rates by a whopping 700 basis points, aimed at tightening lending conditions and thus stemming demand-driven inflation in the economy.
According to data released by the Central Bank last week, licensed commercial banks increased their total outstanding credit to the private sector by only 2.0 billion rupees, which also has an element of rupee depreciation on their foreign currency-denominated loans, such as loans are converted at a weaker exchange rate at the end of the month, resulting in a higher value of the rupee.
This therefore reflects that private credit may have actually contracted in May but for the rupee’s depreciation on the portfolio.
Instead, what banks do is raise deposits and lend to the government through Treasury bills and bonds that generate a comfortable margin for them with much less credit risk.
Since June, however, banks have also seen some slowdown in deposits coming into the system as market liquidity conditions tighten while hyperinflation hits people’s real incomes.
Consumer prices in the Colombo area rose an unprecedented 55 percent in June, while food prices jumped 80 percent, reflecting that money has completely lost its value in Sri Lanka.
Meanwhile, banks fear a wave of defaults that could deal a huge blow to their asset quality, earnings
and capital.
Banks have reportedly rejected a request by the tourism sector to extend the loan moratorium as the hard-hit industry has been on a payment holiday since 2019.
Meanwhile, net credit to the government from licensed commercial banks declined by 49.0 billion rupees in May, while credit to public corporations rose by 25.1 billion rupees.
Money supply, as measured by broad money, or M2b, increased 18.6 percent in May, slowing from 20.0 percent in April. In June and the following months, monetary aggregates are expected to narrow further.
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