Cracking credit conundrum

Wednesday, 24 September 2014 00:33 - - {{hitsCtrl.values.hits}}

Interest rate cut for cash parked at CB’s temporary window along with restrictions
Daily auction facility suspended until further notice
Monetary Board confident new moves will actively encourage commercial banks to utilise substantial amounts of excess liquidity to enhance flow of bank credit to private sector at more reasonable interest rates

The Central Bank yesterday made a fresh crack at solving the low credit conundrum in the country despite relaxed monetary policy, with the latter problem leading to excessive liquidity in the banking system. Three emphatic measures were announced yesterday following the September monetary policy review after previous attempts, which included urging banks to step up credit, failed to produce desired result.

One was to limit the access of Open Market Operation (OMO) participants to the Standing Deposit Facility (SDF) of the Central Bank at the currently-applicable SDF Rate of 6.50% to a maximum of three times per calendar month. Any deposits at the SDF window exceeding three times by an OMO participant are to be accepted at a reduced interest rate of 5.00% per annum. This measure will be effective from 23 September 2014 until further notice. For the remainder of the month of September 2014, access to OMO at the SDFR will be limited to twice per participant. The Standing Lending Facility Rate (SLFR) will remain unchanged at 8.00%. Secondly, the daily auction facility will be suspended with effect from 23 September 2014 until further notice. “The Monetary Board is of the view that the above measures would actively encourage commercial banks to utilise the substantial amounts of excess liquidity to enhance the flow of bank credit to the private sector at more reasonable interest rates, and thereby support the growth momentum of the economy, given the low inflation environment,” the Central Bank said in a statement. The Monetary Board action was following its admission that in recent months the credit extended to the private sector by commercial banks has remained modest in spite of the continued easing of monetary policy, resulting in the accumulation of a large amount of excess liquidity in the domestic money market. In this regard, the Monetary Board was of the view that such liquidity must ideally be utilised for productive economic activities instead of remaining unutilised for a considerable length of time in the system. The Board has also noted that these excess funds have been placed by several commercial banks on a continuous basis with the Central Bank under its standing deposit facility window, although such window has been essentially designed to provide an opportunity for OMO participants to deposit their excess liquidity at infrequent intervals to tide over temporary liquidity excesses. In that background, the Monetary Board was of the view that an appropriate monetary policy action needs to be implemented to address these concerns, particularly in view of continued low levels of inflation and benign inflation expectations. Private sector credit growth was 2% in June, its lowest since April 2010, down from 2.2% in May. The Central Bank said yesterday credit to the private sector from commercial banks remained moderate during July 2014. With Treasury yields at below 6.3%, the 6.5% deposit rate had presented banks with a profitable arbitrage opportunity, but the lower deposit rate will now pressure them to boost their lending to customers, Reuters said. While the policy lending rate is already at multi-year lows, commercial banks’ lending rates are above 13%, it added. The Central Bank said the growth of broad money (M2b) moderated in July 2014 to 11.9% (y-o-y) from 13.3% in the previous month, although net foreign assets (NFA) of the banking system continued to improve. On an aggregate basis, public corporations repaid debt to the banking system during the month, while net credit to the government (NCG) from the banking sector increased. In its announcement following September Monetary Policy Review, the Central Bank said economy performed strongly during the second quarter of 2014 with a real GDP growth of 7.8% compared to the 7.6% recorded in the first quarter of 2014. The growth in the second quarter was led by robust performance in the Industry sector, while the Agriculture and the Services sectors complemented the overall economic performance. The growth of 7.7% in the first half of 2014 augurs well in meeting the expectations for the year. The low inflation environment continued as inflation remained benign in August 2014 with year-on-year (y-o-y) headline inflation at 3.5% and core inflation at 3.9% (y-o-y). On an annual average basis, headline inflation was at 4.5% while core inflation was at 3.2%. Looking ahead, the positive impact of the recent reduction in administered prices for energy and fuel is expected to be reflected in price levels from October. Accordingly, inflation is projected to remain comfortably at around 3-4% by end year, compared to the previously envisaged range of 4-5%.

COMBank to cut lending rates

Top listed lender Commercial Bank of Ceylon has immediately signalled its intention to cut lending rates following yesterday’s moves by the Central Bank. “We are lowering our lending rates in line with the new decision,” Commercial Bank Chairman Dharma Dheerasinghe told Reuters. Reuters said some banks and economists say they have not seen much demand for borrowing for investment, as consumer spending is declining due to higher taxes and lower disposable income. Analysts said a lack of transparency in Government contracts had also dampened business sentiment.

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