Private credit negative for second straight month

COLOMBO: Sri Lanka’s private credit was negative in July 2022 for the second straight month, data from the state debt office showed, as high-interest rates discouraged new loans and customers focused on repayments.

Slowing domestic credit helps stabilize the rupee by reducing outflows through the trade as investment or consumption credit falls, along with the broader economic activity.

Private credit outstanding fell 40.8 billion rupees to 3,263.9 billion rupees in July after falling 40.6 billion in June bringing down the annual growth rate to 15.2 percent from 17.1 percent.Credit to state enterprises still grew 24.9 billion rupees in July, with annual growth at 53.7 percent up from 52.7 percent a month earlier.

Credit to the government grew 149.1 billion rupees with central bank credit up 169.8 billion rupees.

Credit from commercial banks fell to 3,562 billion rupees in July from 3,602.8 billion rupees in June.

Some liquid banks are no longer investing in rupee bonds but are placing cash overnight in the central bank.Meanwhile, concerns over whether rupee bonds would be re-structured have also put off some from investing in them exposing a gap in the current debt restructuring framework.

In past currency crises, following a float of the currency, banks bought into bonds as private credit slowed.

Sri Lanka’s balance of payments has corrected sharply since rates were raised in April but there is still no clean float.