Credit where credit is due

The Central Bank’s figures for the month, published last week, revealed that the total outstanding amount of credit cards issued by all licensed commercial banks had increased by Rs. 3.7 billion. This was the first time in many months that the balances increased by such a considerable amount. 

The most obvious trend is the shift of NPLs (Non-Performing Loans), which is unsurprising in current times. Businesses have found it difficult to run efficiently during bad economic times due to the associated financial demands.

Rising financial costs make it impossible for them to repay any loans they might have taken, leading to the observed increase in NPLs. Historically, NPLs have hovered around 5%, which is now expected to double given the context. 

However, the capacity to access critical capital for businesses to operate has never been more important, especially in conditions such as the current one, yet lenders would not want to lend blindly. To keep portfolios clean, firms would seek more informed lending. This is responsible lending, which is required to help ensure market financial stability.

After slowing in September, when inflation reached the highest levels ever recorded in Sri Lanka since officials began tracking changes in the consumer price index, the card balance fell in October. By the end of November, the total outstanding card balance had risen to Rs. 140.4 billion. The total outstanding card balance has climbed by Rs. 7.1 billion in the eleven months, according to November data. 

According to the CRIB Act, the Credit Information Bureau (CRIB) role is to spread credit to all levels of the market. To ensure that everyone, regardless of circumstance, is involved in the credit process and has access to credit, to facilitate borrowing, and to ensure lenders have enough information to ensure no one is disadvantageously treated in the process.

A credit score has the advantage of being dynamic. Each time a person receives a credit product, whether it is a credit card, a personal loan, or a home loan, their credit score improves. There are numerous other advantages to using a credit score system. It is natural for people to experience difficulties when trust is a key component of the transaction. 

A borrower would not want the lender to look into his loan history, especially if there have been any payment delays. More importantly, the lender needs to ensure repayment of the loan. A lender who may be hesitant to extend loans, need not be as concerned about credit history, with a credit score in place to estimate the party’s ability to pay back a loan. An algorithm utilises past data to alter solely the score. 

Furthermore, having a high or poor credit score does not preclude you from obtaining loans. Those with a higher score have the ability to negotiate higher limits, a larger loan, or lower interest rates.

The informal sector is mostly comprised of microfinance, which is a component of lending mechanisms for SMEs and rural borrowers. 

Overall, if the whole value of loans obtained is considered, the majority will come from the formal sector, where a relatively small number of high-value loans will account for the majority of the total value of loans provided. However, when it comes to the volume of loans authorised, the smaller informal loans exceed the larger ones.

The informal sector, particularly microfinance organisations, is thus a vital source for those living in rural communities who would otherwise struggle to meet formal sector lending standards. Microfinance institutions are also to be permitted to connect to the CRIB. 

While changes in card balances provide a reasonable insight into consumer spending and patterns, a direct correlation between the two could not be formed because the majority of transactions continue to take place outside the realm of electronic cards. 

Reflecting the higher credit rules, the number of active cards fell by 21,170 in November, bringing the total number of persons who use an active card to 1,954,165 by the end of the month.