The Central Bank had offered Rs. 1 billion at coupon rate of 7 percent per annum, but the bidding process took the weighted average yield on this bond issue to 9.53 percent, which is three basis points higher than the policy rate applicable for overnight borrowings of commercial banks from the Central Bank.
"Demand for the bond was very high and that is why it was six times oversubscribed. The Central Bank also thought 9.53 percent was good enough for the long term and decided to accept Rs. 1.6 billion more on behalf the government," a dealer said.
Dealers said demand was high because commercial banks had plenty of excess liquidity.
"For the past three months, the commercial banking system has had an excessive overnight liquidity position of between 20 to 30 billion rupees on average and they have been looking for long term investments for these funds," a dealer said.
"Although banks have excess rupee positions, they are still cautious in their lending after the global financial crisis. The Central Bank is also mopping up excess liquidity in the market to contain inflation," another dealer said.
Private sector credit growth has been slow according to available data, but credit to the government and public corporations have been growing at a much faster rate.
Private sector credit grew by 3.5 percent last May to Rs. 1,249.9 billion from Rs. 1,207.1 billion a year ago, Central Bank data showed.
Bank loans to the private sector grew by 3.4 percent to Rs. 1,098.2 billion in May from Rs. 1,061.8 billion a year ago while credit from domestic sources grew 4.4 percent to Rs. 151.7 billion from Rs. 145.3 billion.
Last April, net credit to the private sector grew by 1.7 percent to Rs. 1,242.7 billion from Rs. 1,222.3 billion a year ago, a stronger year-on-year growth than in March which was a marginal 0.1 percent.
The bulk of this credit was from the domestic banking unit, which increased its lending in April by 2.5 percent to Rs. 1,093.7 billion from Rs. 1, 067.5 percent a year earlier. In March, it recorded 0.5 percent growth. Credit from foreign sources declined 3.8 percent from Rs. 154.8 billion in April 2009 to Rs. 149 billion.
According to latest Central Bank data, net credit to the government fell by 9.2 percent to Rs. 673.5 billion in May from Rs. 741.9 billion a year ago. The decline was driven by a 61.6 percent decline in credit from the Central Bank to Rs. 106.9 billion from Rs.278.5 billion a year ago.
However, credit to the government from the domestic banking system grew much faster than credit to the private sector in May. It increased by 32.6 percent to Rs. 463.3 billion from Rs. 349.5 billion. Credit from foreign sources declined 9.3 percent to Rs. 103.3 billion from Rs. 113.9 billion.
Meanwhile, net credit to public corporations grew 92.9 percent in May to Rs.102.8 billion from Rs. 53.3 billion a year ago. Credit from domestic banking sources increased by 96.9 percent to Rs. 74.2 billion from Rs. 37.7 billion a year ago while credit from foreign sources increased by 83.3 percent to Rs. 28.6 billion in May, from Rs. 15.6 billion a year ago.
Several top officials, such as Treasury Secretary Dr. P. B. Jayasundera, said the government was planning structural fiscal reforms that would contain high budget deficits. They also said the government was planning tax cuts to the banking sector while corporate and individual taxes would also be slashed in order for the private sector to bridge the investment deficit in the country and reach seven to eight percent economic growth and double the wealth of Sri Lankans by 2016.
Last January, the Central Bank warned the government against reckless spending and urged it tap into foreign sources to bridge deficits leaving space for the private sector to borrow from the domestic banking sector. It said private sector credit would have to double in order for per capita income (Gross domestic product, or the size of the economy, divided by the population) to double by 2016.
source - www.island.lk
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