With interest rates rising, since end December 2011 private sector credit from the banking sector grew 12 percent as at end June 2012, well below the Central Bank imposed limit of 18 percent, to Rs. 2 trillion, up 34.6 percent from a year earlier.
Government borrowings from the domestic banking sector grew 18.5 percent from December to end June to Rs. 560.3 billion, down 38.2 percent from a year earlier. Borrowings from the Central Bank grew 23.4 percent during the six month period to Rs. 324.2 billion as at end June 2012, down 33 percent from a year earlier.
For the first six months of this year, the domestic banking sector has generated new loans amounting to Rs. 220.1 billion to the private sector. New loans generated from January 2011 to January 2012 amounted to Rs. 506 billion.
The Central Bank issued fresh loans to the government amounting to Rs. 61.5 billion during this period with repayments amounting to Rs. 22.2 billion in May and Rs. 5.3 billion in June. For one year ended January 2012, the Central Bank issued new loans amounting to Rs. 197 billion to the government.
Government borrowings from the banking sector generated new loans amounting to Rs. 87.5 billion, during January to June 2012 with a settlement of Rs. 5.7 billion being made in June. Last year, the domestic banking sector lent Rs. 159.8 billion to the government.
Higher than expected credit growth last year fuelled a balance of payments crisis with the Central Bank refusing to adjust the exchange rate or interest rates accordingly.
In February this year, authorities were forced to adopt a slew of policy reversals to tackle the balance of payments problem.
Policy interest rates have been raised and a more flexible exchange rate policy is now being followed. The Central Bank also capped an 18 percent cap on banking sector credit growth. Fuel and electricity prices were revised upwards to reflect global market conditions.
These measures have been commended by economists, who point out that the burden on the public could have been much less had these adjustments been taken much earlier.