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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Island/LBO :SL banks should lend more

Island/LBO :SL banks should lend more

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1Island/LBO :SL banks should lend more Empty Island/LBO :SL banks should lend more Wed Feb 19, 2014 10:18 am


Manager - Equity Analytics
Manager - Equity Analytics

LBO :SL banks should lend more to utilize new economic capacity: CB Governor

Sri Lanka’s banks should lend more to businesses associated with ports, airports, health and information technology to make use of expanded capacity in the economy, Central Bank Governor Nivard Cabraal said.
Sri Lanka’s government has developed infrastructure in recent years with ports, airports and roads generating extra capacity and opportunities for business in the economy, he said.

"We need to concentrate a fair amount of investments into these areas," Cabraal said.

"Then only capacity will be utilized. We want capacity to be utilized, so that the economy can grow without the risk of inflation." In a monetary policy statement released Monday, the Central Bank said it was keeping a policy corridor unchanged at 6.50 percent to drain excess money and 8.0 percent to inject liquidity.

But the decision making monetary board said it was "appropriate to further encourage the utilisation of this investment potential, since such policies by the government would give rise to increased and accelerated sustainable economic growth in the period ahead."

Cabraal said further monetary loosening was not envisaged at this time but "real economy" developments were needed, with support from the banking sector for businesses in areas that were opening up.

Examples including the IT sector, health, port and airport sectors, he said.

Sri Lanka has stayed away from outright directed lending in recent years, which can divert credit and management efforts from high growth areas that comes up from human ingenuity, into low growth areas favoured by planners as happened to India in the past.

Directed lending can also result in large volumes of bad loans. In several countries so-called ‘development banks’ have run into trouble due to politically directed lending.

In Sri Lanka recent examples of such problems included the state-run SME Bank and Lankaputhra Bank requiring tax-payer bailouts. In the recent past despite greater pressure for directed lending from some quarters, Cabraal had encouraged banks to lend only to viable projects.

Sri Lanka is recovering from a balance of payments crisis and credit bubble in 2011/2012, which was worsened by large volumes of credit taken by loss-making state enterprises. Heavy government borrowing from the banking sector as tax revenues fell in the wake of the crisis also kept lending rates high and crowded out private business.

High interest rates during the period also made several business groups that were on a credit funded expansion path pause, probably saving them from worse grief later, some analysts say. But loans to businesses are now starting to pick up. The Central Bank said in the 12 months to December loans to private business rose 7.5 percent. In absolute terms loans to industry and businesses was up by 200 billion rupees in 2013 compared to 167 billion rupees a year earlier. But loans to agriculture and gold-backed loans were down, the statement said.

Gold-backed loans rose in Sri Lanka during a global gold bubble, but gold prices have since fallen and banks have tried to reduce their exposure to gold loans.

The Central Bank has also started a process to merge small banks and troubled finance companies into fewer larger entities which would be stronger and less effort will be required to regulate them. Asked whether the merger process will distract management efforts from lending operations in the short-term, Cabraal said while the top management was involved in mergers, people in lower levels are expected to continue work as usual.

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