Dealers said the increase in loans to the private sector was caused by companies restructuring their loans in order to make use of lower interest rates.
"Apart from this, we are yet to see demand for credit to finance new projects or expansion activities. These could take some time to materialise," a dealer said.
Another dealer said large scale projects in tourism and manufacturing were being discussed at this stage and would take some time before credit is approved.
Commercial Bank have been holding excessive liquidity positions averaging over Rs. 30 billion during the past three months, and the government is offering the most attractive investment for this money.
Credit to the private sector began to decline in May 2009 and continued to be in negative territory and only recovered when it increased a marginal 0.1 percent in March 2010 to Rs. 1,235.4 billion from Rs. 1,234 billion in March 2009.
Since the war ended, the Central Bank has been reducing monetary policy rates in a bid to stimulate economic activity but banks were slow to respond. Last November, the government tried to force through across the board reduction in interest rates by directing state-owned banks to reduce rates. But this did not have its desired effect with commercial banks taking their time to revise interest rates downward.
In January this year, the Central Bank said it was crucial that lending to the private sector picked up, as economic growth, and an increase in per capita income, required an increase in private sector activity. The bank went as far as to warn the government against reckless spending on its part, as low inflation and low interest rate environment would come under threat.
Interest rates are now much lower than what they used to be a year ago, but banks are still not comfortable in lending. They prefer instead to invest in government Treasury bills and bonds. In fact, the auction of these securities over the past couple of weeks have generated a lot of demand from the commercial banking system, with dealers saying they were confident single digit interest on these securities would remain for another year.
But the private sector is still not seeing enough credit and dealers said they strongly felt the Central Bank would be compelled to bring down policy rates further in order to stimulate lending to the private sector.
In June, net credit to the government declined by 11.6 percent to Rs. 682.4 billion from Rs. 771.8 billion a year ago, largely on reduction on credit from the Central Bank which was Rs. 254.7 billion in June 2009, which has declined 57.4 percent to Rs. 108.6 billion.
However, domestic bank loans to the government increased by 19 percent to Rs. 474.9 billion from Rs. 399 billion a year ago while loans to public institutions increased 119 percent to Rs. 81.8 billion from Rs. 37.4 billion a year ago.
source - www.island.lk
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