Tuesday, 15 July 2014 00:00
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Despite low interest rate environment, banking sector advances to private sector dips by 2.2% in May hot on the heels of 3.3% drop in April
CB says continued low inflation regime should encourage banks to further reduce lending rates by tightening their spreads
Revival in credit envisaged from second half onwards; new support for pawning-based lending to help
The monetary authorities are continuing to grapple with poor demand for credit, with latest data showing a further contraction for the second consecutive month.
The Central Bank disclosed yesterday that credit to the private sector by the banking sector contracted by 2.2% year-on-year in May. In April it dipped by 3.3%. The continuous dip is despite interest rates being at an all-time low. Part of the decline is also attributed to the depressed pawning advances whilst other analysts pinned it on the lack of enthusiasm from the private sector.
The Central Bank however said: “As markets remained sufficiently liquid, the continued moderation of growth of credit to the private sector is deemed temporary in view of gradually adjusting bank lending rates.”
“At the same time, given the continued low inflation environment, the Central Bank would continue to encourage the banks to utilise the available space to reduce market lending rates further while tightening their spreads to provide further stimulus to the private sector to demand credit from the banks,” the Central Bank said yesterday following the July review of monetary policy.
In this background, the Monetary Board decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at their current levels of 6.50% and 8.00%, respectively.
The Central Bank said that further, in support of credit granted on gold-backed loans, it had introduced a new credit guarantee scheme for pawning advances in June 2014 for Licensed Commercial Banks and Licensed Specialised Banks engaged in pawning activities, to provide enhanced levels of credit to their customers. “This scheme would assist farmers, small business owners and the SME sector entrepreneurs who use pawning advances for their economic and business activities,” the bank added.
Following the June monetary policy review, the Central Bank admitted that in spite of the relaxed monetary policy environment since December 2012, the continued moderation of growth of credit to the private sector seems to reflect the customary transmission lag of around 18 months and the contraction in gold-backed loans since April 2013.
At the Monetary Board meeting of 17 June, it was noted that interest rates on bank deposits have reduced to expected levels, although the lending rates in the market have still not adjusted in line with the decline in the deposit rates.
As a result of such slower-than-expected adjustment in market lending rates, corporates have increasingly resorted to alternative sources of financing, such as corporate debt and equity issuances, suppliers’ credit, and funds raised from abroad under relaxed exchange control regulations to meet their needs.
Nevertheless, the Central Bank said a reasonable level of expansion in bank credit disbursed to productive sectors of the economy is considered beneficial for the continued growth in economic activity.
In this regard, the Central Bank was of the firm view that the banks now have adequate space to reduce market lending rates further to encourage the private sector to demand credit from the banking sector, while also tightening the spread between lending and deposit rates of banks to a more reasonable level. Accordingly, the Monetary Board also decided to urge banks to lower their market lending rates in order to reflect these changing circumstances.
The bank expressed hope in June that with the realisation of the effects of the eased monetary policy stance, a turnaround in credit growth could be expected in the second half of the year.
Data coming from June onwards will be closely watched by financial services industry stakeholders.
Whilst low private sector credit remains a thorn, the Central Bank said yesterday indicating a positive trend, Net Credit to the Government (NCG) contracted by around Rs. 11.5 billion in May while credit to public corporations also recorded a marginal decrease.
The Central Bank has also noted with satisfaction the recent steps adopted by several bank and non-bank financial institutions supervised by the bank, to introduce a number of investment instruments providing long-term benefits aimed at senior citizens who rely on interest income. Such innovative financial products and schemes would provide the essential comfort to this segment of the population in a sustained low inflation environment.
At the meeting held on 11 July, the Monetary Board also noted the ongoing downward adjustments in market lending rates, which would result in the expected benefits of low cost of finance being fully transmitted to productive sectors of the economy.
In its statement following the July monetary policy review, the Central Bank also said the low inflation environment has continued, with year-on-year inflation remaining benign in June 2014 recording its lowest level since February 2012, while the annual average inflation has trended downwards.
Headline inflation (y-o-y) for June 2014 recorded 2.8% from 3.2% in the previous month, while core inflation remained low at 3.5% in June, although marginally higher than 3.3% in May 2014. Prices of some items in the food category increased, but the base effect and the decline in non-food prices have contributed to the low inflation.
Looking ahead, year-on-year inflation is expected to remain comfortably within mid-single digit levels during the remainder of the year in spite of weather-related variations in agricultural produce.
In the external sector, the trade deficit has contracted for the eighth consecutive month in May 2014 led by a contraction in expenditure on imports while an increase in earnings from exports was observed mainly as a result of higher industrial and agricultural exports. Inflows from workers’ remittances and earnings from tourism have continued to grow.
In the meantime, increased foreign inflows, on a net basis, were recorded due to investments in Government securities and inflows to the Colombo Stock Exchange and the private sector. Given the substantial foreign inflows, the Central Bank has absorbed around $ 735 million from the domestic foreign exchange market by 10 July. Gross Official Reserves as at end May 2014 remained strong at $ 8.8 billion, equivalent to 5.9 months of imports.
Broad money (M2b) recorded a y-o-y growth of 13% in May 2014. The improvement in Net Foreign Assets (NFA) of the banking system largely contributed to the growth of broad money supply during the month.
Balance of Payments surplus boom continues; $ 1.67 b by end May
The Central Bank said yesterday that the country is enjoying a “healthy surplus” in the Balance of Payments during the first five months of this year in comparison to the corresponding period of last year.
It said favourable external trade together with higher inflows on account of workers’ remittances, increased tourist earnings and continued inflows to the financial account were key contributors to the positive BOP surplus.
During the year up to end May 2014, the overall BOP is estimated to have recorded a surplus of $ 1.667 billion compared to a surplus of $ 126.5 million recorded during the corresponding period of 2013.
Earnings from tourism in the BOP services account: The cumulative growth in tourist arrivals up to May 2014 was recorded at 26.5% to 624,178. On a cumulative basis, earnings from tourism recorded an impressive growth of 35.8% to $901.8 million during the first five months of 2014.
Meanwhile, June tourist arrivals grew at a rate of 14.3%, year-on-year, to 103,175, while earnings from tourism increased by 22.7% to $149.1 million. The top five sources of tourist arrivals in June 2014 were India, China, UK, Maldives and Australia accounting for about 47% of tourist arrivals during the month.
Current transfers in the BOP: Workers’ remittances increased by 8.8%, year-on-year, to $557.5 million in May 2014 from $512.4 million in May 2013. Workers’ remittances during the period from January to May 2014 grew by 10.5% to $2,774.8 million compared to $2,510.7 million recorded in the corresponding period in 2013.
The growth in remittances continues to be driven by increased labour migration in the professional and skilled categories.
Financial account of the BOP: Net inflows to the Government securities market from January to end May 2014 amounted to $229.4 million, which comprised net inflows to Treasury bills and Treasury bonds amounting to $92.3 million and $137.1 million, respectively. Long term loans obtained by the government during 2014 up to end May 2014 amounted to $820.9 million, compared to $685.3 million recorded during the corresponding period in 2013.
Meanwhile, the inflows to the Licensed Commercial Banks (LCBs) and Licensed Specialised Banks (LSBs) during the first five months in 2014 amounted to $93.8 million. Further, net foreign inflows to the Colombo Stock Exchange (CSE) in May 2014 amounted to $69.9 million compared to $35.4 million recorded in the corresponding period in 2013. On a cumulative basis, the net inflows to the CSE up to end May 2014 amounted to $19.3 million.
International reserve position: By end May 2014, Sri Lanka’s gross official reserves amounted to $8.8 billion, while total foreign assets, which include foreign assets of the banking sector amounted to $10.2 billion. In terms of months of imports, gross official reserves were equivalent to 5.9 months of imports at end May 2014, while total foreign assets were equivalent to 6.9 months of imports.
It is noteworthy that a healthy level of reserves was maintained, despite outflows on account of foreign debt service payments of $987.4 million and IMF-SBA payments of $264.7 million.
