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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Red Alert - Inflation check needed before lifting credit ceiling, warn economists

Red Alert - Inflation check needed before lifting credit ceiling, warn economists

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Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics
Despite the expectation of the Sri Lanka Bankers Association (SLBA) that the presently imposed credit ceiling on banks would be lifted at least by the end of this year, top economists cautioned the regulator to only lift the regulation at the right time due to the persistent rise in inflation. According to ex Central Banker W.A. Wijewardena, the Central Bank should ideally consider the removal of the limit only once the inflation eases to a manageable level.

“Removal or easing of the credit ceiling at this moment would be similar to ‘adding fuel to fire’ with YoY inflation remaining at 9.8% already. If the CBSL is to consider such a removal it should wait at least one full year with a 5% YoY inflation continuously”, Wijewardena said responding to a question on the ideal time of lifting the ceiling by the CBSL.

According to recent statistics from the Department of Census and Statistics, year-on-year (YoY) inflation rose to a 15 month high of 9.8 per cent in July 2012 from 9.3 per cent in June 2012. However, inflation rate compiled by the Colombo Consumers’ Price Index (CCPI) computed by the Department of Census and Statistics, increased to 6.0 per cent in July 2012, on an annual average basis, from 5.8 per cent in the previous month.
Meanwhile the Secretary General of SLBA, Upali de Silva said that he was confident the CBSL would consider the adverse consequences of the credit ceiling on banks and therefore lift it at least by the end of this year.

“We feel that the credit ceiling of 23% should be lifted sooner or later and not continued for a longer period as it has affected the balance sheets and the bottom line of banks negatively. This is particularly true for smaller banks whose growth has been curtailed significantly, “So we hope the CBSL would consider these consequences and lift the ceiling by the end of this year,” he said.
Apropos our article titled ‘Smaller banks hit by lending limits’ published on June 17 under these columns, we correctly reported that the credit ceiling was expected to curtail the growth potential of banks by hitting the smaller players in the hardest way.

Meanwhile, the CEO of Nations Trust Bank, Saliya Rajakaruna expressing similar sentiments said that he was also optimistic that the regulator might consider lifting the credit ceiling since the economy once over-heated was now rebalancing.
“By and large, an economy is rebalanced by the regulator through popular instruments such as exchange rate and interest rate. Credit ceiling is imposed when the regulator wants an accelerated impact which is not relevant anymore”, Rajakaruna said stressing the importance of a level playing field in a ceiling-less environment.

When contacted the Deputy Governor, B D W A Silva said that although there was an understanding between the CBSL and the SLBA on the lifting of the credit ceiling by the end of this year, they would have to take a ‘wait and see’ approach prior to such a decision.
http://www.nation.lk/edition/business/item/8952-red-alert.html

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