CB insists more room to lower lending rates

Wednesday, 21 May 2014 01:37 - - {{hitsCtrl.values.hits}}

Rs. 35.1 b total reduction in credit to public corporations in 1Q
Credit to private sector up by Rs. 7.6 b in March; Rs. 15.3 b rise in credit extended from the domestic banking units
Export earnings in March top $ 1 b recording a significant 28.6% growth

The Central Bank yesterday kept policy rates unchanged insisting series of measures taken in the recent past have created more space to lower lending rates. The bank also said it expects commercial banks to pass the benefit of the eased monetary policy stance to borrowers without further delay. In its statement post-May monetary policy review, the bank said since December 2012, the Central Bank has eased monetary policy with its key policy interest rates, the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR), being reduced by 125 and 175 basis points, respectively, and the Statutory Reserve Requirement (SRR) on rupee deposit liabilities of commercial banks being reduced by 2 percentage points during the period. “Responding to the eased monetary policy stance, both market lending and deposit interest rates have adjusted downwards substantially, although there is further room for downward adjustment in long term lending rates,” the bank said. Benign inflation and favourable inflation outlook, which were the key contributory factors in enabling the maintenance of the current monetary policy stance, continue to remain favourable. In April 2014, year-on-year (y-o-y) headline inflation was 4.9%, which was well within the desired range, while y-o-y core inflation remained unchanged at 3.4%. Inflation is projected to remain benign in the months ahead, supported by favourable expectations although weather related supply disruptions could cause some marginal variation in the behaviour of certain food items. In the external sector, the trade deficit contracted by nearly 12% for the first quarter 2014 boosted by high export trade volumes recorded in March 2014. Export earnings in March surpassed $ 1 billion recording a significant 28.6% growth (y-o-y). Further, the outlook for export earnings remains positive on account of the firming up of the recovery in advanced economies.

Central Bank gives lifeline for pawning biz

Introduces Rs. 500 m credit guarantee scheme to boost credit flows to productive sectors of the economy through pawning advances

The Monetary Board has approved the implementation of a credit guarantee scheme on behalf of the Government for pawning advances granted by licensed banks, in order to support lending against gold articles. The Monetary Board has also approved an allocation of Rs. 500 million from the Central Bank as the seed fund to support the credit guarantee scheme. The Central Bank said this scheme is expected to address the significant reduction in pawning advances that had arisen as a result of the decline in gold prices in the international market since early 2013. Further, as these advances have been predominantly used to fund agriculture and the SME sectors of the economy, the authorities were of the view that pawning advances need to continue so as to provide the required funds to support such economic activities. In the meantime, the attention of the Central Bank was also drawn to the present loan to value (LTV) ratio of around 65% and high rates of interest charged on pawning advances, which had further dampened the pawning credit activities. "Pawning advances 2012 2013 % Change 339.4 292.9 -13.7% % share of total lending 11.6%" The new guarantee scheme contemplates the licensed banks contributing a premium of 1% p.a. which would enable them to increase the LTV ratio up to a maximum of 80%, whilst the interest rate would be capped at 16% p.a. on the advances. As a result of this scheme, the borrowers and the lending banks will be able to increase the credit flows to the productive sectors of the economy through pawning advances. “This scheme will be operated by the Regional Development Department of the Central Bank of Sri Lanka, on behalf of the Government,” the Central Bank said. According to 2013 Annual Report of the Central Bank, last year the country’s banking sector pawning portfolio dipped by 17.1%. A distressing market for gold and a dip in pawning-based lending and associated issues also contributed to the weakening of the quality of assets in banking leading to an increase in the NPL ratio from 3.7% as at end 2012 to 5.6% by end 2013. NPLs increased by Rs. 74 billion during 2013, of which Rs. 56 billion relates to pawning advances. In comparison, the increase in NPLs amounted to Rs. 17 billion in 2012.

Modest imports expenditure A modest increase in expenditure on imports was also observed in March due to increased intermediate and consumer goods imports ahead of the April festive season. Inflows on account of workers’ remittances recorded a significant increase in March 2014 while earnings from tourism also continued to increase during the first four months of 2014 surpassing the half million mark in tourist arrivals by April 2014. As at end March 2014, gross official reserves were at $ 8.1 billion, equivalent to 5.5 months of imports. Since then, the level of reserves has increased further with the inflows from the proceeds of the seventh international sovereign bond issued in April 2014. Broad money (M2b) continued its moderating trend to record a y-o-y growth of 14.5% in March 2014, moving towards the projected average growth of 14% in 2014. The increase in net foreign assets (NFA) of the banking sector by Rs. 24.8 billion as well as the significant increase in net credit to the government (NCG) by Rs. 48.6 billion, mainly contributed to the growth of broad money during the month of March. Public corporations continued to settle their liabilities to the banking sector, with total reduction in credit to public corporations during the first three months of the year amounting to Rs. 35.1 billion. Credit extended to the private sector increased by Rs. 7.6 billion in March 2014. An increase of Rs. 15.3 billion was observed in the credit extended to the private sector from the domestic banking units (DBUs), while repayments by BOI companies to offshore banking units (OBUs) dampened the overall credit growth. The sharp decline in pawning advances contributed largely to the continued low growth of credit to the private sector. Having considered the above, the Monetary Board, at the meeting held on 19 May, was of the view that the current monetary policy stance is appropriate and therefore, decided to maintain the policy interest rates of the Central Bank, namely the SDFR and the SLFR of the Central Bank unchanged at their current levels of 6.50% and 8.00%, respectively. In order to counter the effect of the continued decline in pawning advances on productive sectors of the economy, the Monetary Board also granted approval to implement a credit guarantee scheme on pawning advances on behalf of the government. The date for the release of the next regular statement on monetary policy would be announced in due course.

CB a tad more dovish than usual: SCB

Standard Chartered Bank (SCB) yesterday said the Central Bank’s leaving of policy rates unchanged reflects that the monetary authority was a tad more dovish than usual. SCB also said it expects CB to keep rates on hold and fourth quarter will likely be the earliest it will consider a policy rate change. In a Global Research Economic Alert, SCB also said the inflation trajectory was not yet a threat. “We maintain a neutral outlook on T-Bonds and revise lower our 2H-2014 yield forecasts,” SCB added.