State banks left with more cash for SMEs as public sector borrows less

Dr. Indrajit Coomaraswamy

by Sanath Nanayakkare-May 12, 2017

Small and Medium Enterprises (SME) in the country have taken a larger share of the credit granted to the private sector by the Bank of Ceylon and the People's Bank as lending by the two state banks to the public sector has moderated, Governor, Central Bank of Sri Lanka (CBSL) Dr. Indrajit Coomaraswamy said in Colombo recently.

Speaking to the media while announcing the Central Bank's monetary policy for the foreseeable future, the Governor said," If you ask the two state banks they will tell you that SMEs have taken a larger share of their total credit pie to the private sector. Part of the reason for this is that corporations like the Ceylon Petroleum Corporation and the Ceylon Electricity Board have done reasonably well due to lower oil prices. So, lending by the state banks to the corporations declined. On the other hand, borrowings by the government from the two state banks also went down somewhat due to the government's fiscal consolidation programme. This combination left the two state banks with quite some cash which was pushed out to the SMEs."

According to the Central Bank Annual Report 2016, credit extended to the private sector by commercial banks continued to expand during 2016, although there was a deceleration on year-on-year growth amid tight monetary policy measures and the effect of the high base.

With aggressive marketing campaigns by commercial banks and ample availability of funds as well as market expectations of upward adjustments in the government tax structure, credit to the private sector continued to accelerate during 2016 in spite of the upward adjustments in market interest rates

The acceleration observed in credit to the private sector in 2015 persisted in 2016, recording a peak growth of 28.5%, on a year-on-year basis by end of July 2016. However, the year-on-year growth of credit to the private sector moderated towards the latter part of 2016 and recorded a growth of 21.9% by end 2016, compared to 25.1% at the end of 2015, reflecting the impact of tight monetary policy measures and the high base.

According to Coomaraswamy, overall credit granted by the banks to the government, to the private sector and to the corporations currently stands at 18%.

"We'd like to see this number around 15%. By our reckoning overall credit granted to these three pillars should moderate to 15% by the end of the year, the Governor said.