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Government and Central Bank push banks to cut rates and lend more to SMEs

DAILY MIRROR | 05.04.2019

The government and Central Bank in lockstep are pushing the banks to cut rates and deploy more funds as loans to the micro, small and medium enterprise (MSME) sector as the authorities attempt to reinvigorate the economy, which has lost its momentum. In a hurriedly called meeting with the bank chieftains held yesterday, at the Temple Trees, Economic Reforms and Public Distribution Minister Harsha de Silva was said to have urged the banks to accelerate lending to the economy, specially to the MSMEs, Mirror Business learns.

The closed door meeting was attended by Central Bank Governor Dr. Indrajit Coomaraswamy, Finance State Minister Eran Wickramaratne, several other lawmakers and some key bureaucrats.

The banking sector officials attending the meeting, including chief executive officers, chief financial officers and other key representatives, said to have pointed out that the current political logjam and the already poor economic outlook prevented them from taking any new risks. Sri Lankan banks recorded extremely high loan impairments and a significant increase in non-performing loans (NPLs) in 2018.

Sri Lanka’s economy lost momentum since 2016 due to a combination of bad fiscal and monetary policies. The growth slowed to 3.2 percent last year, well below the economy’s potential, following the tight policies implemented since mid-2016.

The data for January showed a de-growth in private sector credit to the tune of Rs.4.2 billion and the Monetary Board in February slashed the Statutory Reserve Ratio by 100 basis points to release liquidity to the market.

The weak data would have certainly troubled the policymakers who have been taking every measure to accelerate growth, as the country is facing some crucial elections in a few months’ time, where the stakes for the ruling party remain high.

Analysts and economists blame the weak ‘animal spirits’ in the economy for the current impasse as consumers and businesses lack confidence in the system.
The consistently weak data could force the Monetary Board to relax the monetary policy next week at its second meeting for the year, to prop up the sluggish economy.

First Capital Research in a report this week said a probability of a rate cut has gone up by 40 percent after the weak fourth quarter GDP growth, which came in at a shockingly low of 1.8 percent.

They see a 50 percent chance for a cut in the Standing Lending Facility Rate by at least 25 basis points.

The fiscal policy has offered little to support the economy so far.

But the recent budget proposed multiple money deploying programmes ranging from providing funds to the newly married for housing and concessionary funding for entrepreneurs and MSMEs.

Meanwhile, the government’s flagship Enterprise Sri Lanka concessionary loan programme has already disbursed about Rs.79 billion across various sectors in little under one year since its launch, to help assist those who want state support to start a business.

First Capital Holdings PLC is an investment bank and is the pioneer non-bank affiliated Primary Dealer in Treasury Bills and Bonds in Sri Lanka. With a track record of over 25 years, the Company was the first licensed primary dealer appointed by the Central Bank, and is also the only listed and rated primary dealer in Treasury Bills and Bonds in Sri Lanka
First Capital delivers the only source for fixed income research in the local financial services industry. The Company’s best-in-class research team provide dynamic reports including economic reviews and proprietary research, encompassing fundamental, quantitative and technical analysis.