Sri Lanka’s banking sector loans accelerated during the last three months as people continued to borrow more for consumption defying higher interest rates, SMEs for their working capital and some corporates to complete their mega expansion projects.
According to data observed by Mirror Business, Sri Lanka’s banking sector has loaned a mammoth Rs.354 billion in new loans during the first four months of the year, approaching half of the total loans given by the banking sector in the whole of 2017.
Sri Lanka’s banks are well on course to surpass a trillion rupees in loans for 2018, given the same pace continues.
In 2017, Sri Lanka’s banks gave out Rs.890 billion in new loans, the highest in any year.
The Central Bank also acknowledges that there is a marginal uptick in bank lending as the numbers point to an upward trajectory in the overall direction.
The year-on-year growth in new loans has been picking up pace from a low of 14.2 percent in February to 15.1 percent in March and further up to 15.2 percent in April.
However, the year-on-year growths have been easing since the credit bubble created in 2015 due to imprudent monetary and fiscal policies. In 2015, the banking sector loans grew by 21.1 percent and came down to 17.5 percent in the following year, and further down to 16.1 percent last year.
The data reflects the banking sector is humming although the overall economy is wobbling.
This obvious paradox explains that the bulk of this money created by the banks are either going mostly to unproductive segments of the economy or those money-hungry projects aren’t yet generating a decent return due to the poor business environment.
Last week Mirror Business showed that one fifth of the loans going into consumption, but there is a drought of funds into the manufacturing and agriculture sectors.
Most Sri Lankans borrow to settle their existing loans, obtained when the rates were higher.
The first four months’ bank loans have not felt the full impact of the surprise policy rate cut made in early April. In April, the Central Bank cut its Statutory Lending Facility Rate by 25 basis points to 8.50 percent.
The full impact of it will be seen in the months that follow April, as the banks will try to push their loan books faster by revising down their loans.
At the time, many economists and analysts queried the rationale for a rate cut, which mostly appeared political than economic, as the regional economies were doing the opposite in response to the increase in the federal funds rate in the United States.
From the beginning of the year through June 10, foreigners sold Rs.22.5 billion worth of government bonds. Hence, further cuts in local rates can spark chaos in the economy as the rupee has already lost 3.5 percent of its value against the dollar.
The data also point out that the loan growth is generally higher during the second half of the year than during the first half.
Further, the banks remain relatively rich in capital as large banks raised Rs.42 billion in equity and Rs.11 billion in debt to stay compliant with the BASEL III thresholds coming into effect from January 1, 2018.
Therefore the banks now rich in funds are prepared to lend at very competitive rates.
One large private lender recently advertised 7-year vehicle leasing facilities at 13.5 percent, a very attractive rate, but the funds go into the highly unproductive sector, indicating the aforementioned paradox.