Mechanism to improve private sector borrowings | Sunday Observer

Mechanism to improve private sector borrowings

The government is in the process of formulating a mechanism to improve private sector borrowings from the banking sector to enable credit growth to reach anticipated 4 percent of GDP growth.

As Sri Lanka’s bank credit extended to the private sector decelerated significantly in the first two months of the year, the government plans to bring down the high market interest rates by 200 basis points, to maintain private sector credit growth at 13.5 percent this year, to reach the anticipated 4 percent GDP growth.

Prime Minister Ranil Wickremesinghe recently appointed a Working Group chaired by Central Bank Monetary Board member Nihal Fonseka to come up with specific measures to bring down the high interest rates, which have been recently ranked as the highest real interest rates in South Asia, Central Bank Governor Dr. Indrajit Coomaraswamy said at the monetary policy review in Colombo last week.

The committee also consists of three bankers and two members of the Institute of Chartered Accountants of Sri Lanka.

“They are looking at ways and means on how the margins between thebenchmark interest rate, treasury rate and deposit and lending rates can be reduced. The spread is far too large and it has led to high interest rates. They will come up with very specific ways in which the spread can be reduced,” Dr. Coomaraswamy said. The report by the working group was submitted to the Prime Minister on Tuesday. Amidst high market interest rates, the growth of credit extended to the private sector decelerated during the first two months of 2019. Private sector credit recorded a repayment or a contraction of Rs.4.3 billion in January followed by a marginal increase of around Rs. 7.6 billion in February 2019.

However, the net credit to the government increased by Rs.156 billion during the first two months of this year, while credit to public corporations decreased by Rs. 40.6 billion during the period.

The broad money (M2b) growth also decelerated to 11.4 percent year-on-year (YOY) in February and 11.5 percent in January, due to the slowdown in private sector credit growth. The Central Bank expects private sector credit to grow by 13.5 percent this year to support the economic growth targets. Hence, Dr. Coomaraswamy said that private sector credit needs to grow at an average of Rs. 75 billion per month for the rest of the year.

“Though the benchmark interest rate, the Treasury rate, has come down significantly this year, the deposit and lending rates have not come down simultaneously and in fact these rates are still on the rise,” he said.

However, the banking sector remains cautious about taking new risks over the sluggish economic outlook.

Amidst the build-up in non-performing loans (NPLS), the banking sector has also been forced to put more effort in improving the asset quality rather than broadening its lending portfolios.

“The delays over government payments of up to Rs. 60-70 billion to the construction sector and Rs. 40 billion in arrears in interest subsidy for senior citizens were some of the key reasons for the recent buildup in NPLS in the banking sector,” he said.

The government is already in the process of settling the payments due to the construction sector and the government will settle the arrears in the senior citizens interest subsidy via a loan or issuing a bond.

Dr. Coomaraswamy expressed confidence that the committee would come up with implementable solutions to bring down the high interest rates, as the working group consists of three members from the banking sector.

“There are some specific measures that give us confidence this time. Our objective is to get market lending deposit rates down by 200 basis points. It will also address the credit crunch that the SMES are facing. That’s where the real crunch has come. The implementation of the International Financial Reporting Standard (IFRS) 9 and Basel III rules also put pressure on the banking sector,” he said.

The Central Bank will show some flexibility to the banking sector in terms of lending to the SME sector. However, the Central Bank doesn’t plan to reverse the implementation of these standards. In terms of rupee liquidity, the Central Bank believes that there is sufficient liquidity in the market as the government has released over Rs. 250 billion through two Statutory Reserve Ratio (SRR) cuts, reversal of margin requirements for vehicle imports and settlement of overdue payment to the construction sector, Dr. Coomaraswamy said.

The recent salary and pension increase in the Budget is expected to further increase money supply and maintain liquidity in the market.