Credit Trend

Jan 13, 2014 (LBO) – Credit to business and personal customers rose 22.3 billion rupees in November 2013 to 2,519 billion rupees, up 7.3 percent from a year earlier, while loans to the state fell, official data showed. Loan to deposit ratios can deteriorate as the Central Bank expands its balance sheet by purchasing securities from banks to print money, allowing them to give more loans than can be matched by deposits alone, triggering high import demand, a situation loosely described as a balance of payments crisis.

When peg defence is abandoned and the currency floated following money printing, the exchange rate weakens.

A decrease is credit to the state can be accompanied by a fall in interest rates as well as a decline in total credit which can initially allow room for foreign reserves to be increased, and loan to deposit ratios to improve as Treasuries are sold back to banks by the Central Bank.

Eventually loans to private business will also pick up as the credit cycle resumes.

Earlier the state spending, is cut the faster the cycle will resume.

Sri Lanka is recovering from its latest balance of payments crisis in 2011/2012.

Credit to state enterprises fell 18.8 billion rupees to 308.0