The robust credit growth despite monetary policy measures implemented in February and April this year, along with other fiscal moves, is likely to be a thorn when the Monetary Board meets today for the July review.
Between January and May of this year, credit to the private sector amounted to Rs. 211 billion, whereas in the same period of last year, the figure was around Rs. 166 billion.
During the one year period ending May 2012, credit to the private sector has grown by Rs. 556 billion.
As per the latest Central Bank data, credit growth to the private sector in May was 33.5%, low in comparison to 34% in April and 36.6% in December last year, yet banking industry experts opined that a much sharper deceleration was envisaged by the Government following monetary and fiscal measures announced in
February this year.
As at end May, cumulative credit to the private sector amounted to Rs. 2.215 trillion, up from Rs. 2.050 trillion in January 2012 and Rs. 2.005 trillion in December 2011. In May 2011 the figure was Rs. 1.659 trillion and in January 2011 it was Rs. 1.530 trillion and December 2010 it was Rs. 1.494 trillion.
Domestic Banking Units (DBUs) lending to the private sector crossed the Rs. 2 trillion mark as at end May, reflecting a 36% growth year on year, whilst lending by Foreign Currency Banking Units (FCBUs) grew by 12% to Rs. 197 billion.
Some viewed the overall credit growth of over 33% as high in comparison to what the Government expected. In that context, the upcoming July monetary policy review scheduled for today will be crucial, analysts said.
The Monetary Policy Review statement for July 2012 will be released tomorrow (Wednesday, 11 July 2012) at 7:30 a.m. and not today as previously scheduled.
Following the June review, the Central Bank said the policy measures adopted during the period February to April 2012 to curtail the growth of credit, reduce import demand and thereby stabilise the external sector have begun to have an effect on the relevant variables. This and other reasons saw policy rates kept unchanged.
The increase in private sector credit in absolute terms in April 2012 was only Rs. 18.7 billion, significantly lower than the average monthly growth of Rs. 51.8 billion in the first quarter of 2012 and Rs. 27.4 billion in April 2011.
However, May data is likely to have foxed the Central Bank as the increase over April was Rs. 36.1 billion, which is also above the average month growth in the first quarter.
The Central Bank also said market interest rates, which had increased substantially so far in 2012 as a result of tight monetary conditions, have started to stabilise in recent weeks.
Following the May policy review, the Central Bank sounded optimistic as well. It said market interest rates have moved up gradually, reflecting the tightening of monetary conditions. Benchmark Treasury bill yield rates have increased and in turn, deposit and lending rates of commercial banks as well as other financial institutions have shown an increasing trend.
Meanwhile, banks have been directed to take measures to reduce the growth of loans and advances to a range of 18 to 23%. Hence, although broad money (M2b) growth was 22.8%, year-on-year, by March 2012, monetary aggregates are expected to decelerate significantly over the balance part of the year.
In May 2012, M2b was down to 20.9%, which is welcome.
Net credit to the Government was up 44.7% in May to Rs. 1.02 trillion, of which lending by monetary authorities was up 243.7% to Rs. 329.5 billion, year on year. Growth in DBUs lending to the Government remained at 18% both in April and May, with the cumulative figure at the latter month at Rs. 566 billion.
On the other hand, credit to corporations grew by 107% year-on-year to Rs. 267 billion, with the bulk of it coming via FCBUs (Rs. 193 billion, up by 268%).
The Central Bank last raised policy rates in April – a move largely linked to explosive growth in credit.
The bank admitted in April that notwithstanding the increase in the policy interest rates in February 2012 and the Direction issued to restrain the growth of credit extended by licensed banks, there are still some signs that credit growth is continuing at an undesired pace.
Therefore, the Monetary Board was of the view that a further adjustment of policy rates of the Central Bank is warranted to ensure a smooth deceleration of credit growth through the year in order to achieve the year-end target and to anchor inflation expectations.
In April the Repurchase rate and the Reverse Repurchase rate were increased by 25 basis points and 75 basis points respectively to 7.75% and 9.75%, which remain effective even as of today. The April revision came soon after the Central Bank in February raised the Repo and Reverse Repo rates by 50 basis points in addition to placing restrictions on bank lending.