SRI LANKA CREDIT UP

Sri Lanka credit to business up 33.3-pct in May

July 11, 2011 (LBO) - Credit to business from Sri Lanka's commercial banks rose 33.9 billion rupees in May 2011 to 1,664.4 billion rupees, with rupee denominated loans rising 30.5 billion rupees and forex loans rising 3.4 billion rupees, official data showed.
In the year to May commercial bank loans to business rose 33.3 percent or 416 billion rupees, edging up from 31.4 percent in April. Growth in rupee denominated loans was 35.1 percent.

Last week central bank has said that private sector credit may slow during the rest of the year. New loans have been hovering around 30 billion rupees in recent months.

Credit to government from banks rose 13.6 billion rupees 476.9 billion rupees in May through year to date growth was flat at 2.9 percent.

Central bank credit to government (printed money) fell to 95.6 billion rupees from 98.4 billion rupees a month earlier.

Loans in dollars to private business rose 3.4 billion rupees to 180.4 billion rupees. In the year to March dollar loans rose 20.5 percent.

Though rupee interest rates are now low compared to earlier rates and the prime lending rates is now around 9 to 10 percent, dollar loans yields are in the mid to low single digits.

Sri Lanka's central bank has tightened its peg with the US dollar by printing less money and borrowers believed that there will be stable exchange rates in the years to come making them comfortable to borrow in dollars.

The phenomenon is known as 'liability dollarization' and is seen is so-called 'soft-pegged' exchange rate environments.

Unlike a 'hard peg' however the legal framework surrounding a 'soft-peg' allows the monetary authority print large amounts of money in a short time, and the peg can break at any time.