Enough, says Cabraal Domestic banks give State Rs. 120bn in new loans, private sector gets Rs. 37bn

The Monetary Board of the Central Bank last month cut the reverse repurchase rate applicable to commercial bank overnight borrowings from the monetary authority from 9.25 percent to 9 percent in a bid to reducing commercial lending rates and reducing the high interest rate spreads of commercial banks, a move money market dealers had been anticipating for weeks.

Despite the reduction in the policy rate, dealers said commercial banks were not seeing enough credit demand, and over the past few weeks the commercial banking system has been investing their excess rupee liquidity in government securities.

The auction of Treasury bills and bonds were heavily oversubscribed this week and rates have been pushed down further. Some dealers said another policy rate cut could be expected, especially in the overnight repurchase window, which stands at 7.25 percent.

"This is a reasonable expectation given the three month Treasury bill rate is now 7.13 percent. Usually, longer the term, longer the rate, so if the overnight rate is more than the three month rate then there has to an adjustment," a dealer said.

Asked about the speculation of another policy rate cut, Central Bank Governor Ajith Nivard Cabraal said banks could speculate all they wanted. "That is what banks do, they speculate and they can continue to do so," he said.

"We reduced the policy rate because we believe it would be enough to stimulate private sector lending," Cabraal told The Island Financial Review in response to a query as to whether the recent policy rate cut would be enough to stimulate credit flows to the private sector or whether another policy rate cut would be required given the continued reluctance of the commercial banking system to lend.

Private sector credit growth continued to be sluggish. Credit to the private sector increased 6.2 percent to Rs. 1,268.9 billion in June from Rs. 1,195 billion a year ago. Loans from the domestic banking sector grew by 6.2 percent to Rs. 1,116.6 billion from Rs. 1,051.8 billion a year ago with new loans amounting to Rs. 18.4 billion from the previous month.

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, with new loans amounting to Rs. 120.3 billion.

The Central Bank earlier this year warned the government against reckless spending that could threaten the low inflation and low interest rate regime and crowd out the private sector of commercial bank funds, which has to double in order for per capita income to double.

Last week, Treasury Secretary Dr. P. B. Jayasundera slammed the lending policies of the banking sector, saying they were insensitive to the country’s economic needs while a top banker, HNB Managing Director and President Bankers’ Association Rajendra Theagarajah, said banks were too tight fisted, investing too much into government securities while almost neglecting the SME sector and micro entrepreneurs.

source - www.island.lk