Sri Lanka banks urged to tighten spreads amid slow credit

July 14, 2014 (LBO) – Sri Lanka’s Central Bank held policy rates at 6.50 and 8.00 percent and urged banks to tighten spreads to lower lending rates as private sector credit demand remained weak. In May credit to the central government from the banking sector has fallen by 11.5 billion rupees and loans to state enterprise had also fallen marginally.

Credit to private sector had also slowed to 2.2 percent from a year earlier, indicating that credit volumes had contracted about 6.8 billion rupees during May.

“…[T]he continued moderation of growth of credit to the private sector is deemed temporary in view of gradually adjusting bank lending rates,” the Central Bank said in its May monetary policy review.

“At the same time, given the continued low inflation environment, the Central Bank would continue to encourage the banks to utilise the available space to reduce market lending rates further while tightening their spreads to provide further stimulus to the private sector to demand credit from the banks.”

Sri Lanka is now recovering a from a balance of payments crisis triggered by a credit bubble worsened by loans to state enterprises to subsidize energy which was ultimately ac