Private credit falls. Since interest rates reached unfavorable levels and as the economy continued to deteriorate, banks have almost stopped lending to private borrowers. As a result, they have tightened credit standards to prevent further harm to their asset quality.
The demand for credit also plummeted when the Central Bank dramatically increased key rates by 700 basis points to tighten credit conditions and consequently curb demand-driven inflation in the economy; banks soon followed suit.
According to information provided by the Central Bank last week, certified commercial banks increased their total outstanding private sector credit by just Rs. 2.0 billion. This expansion was also impacted by the depreciation of the rupee, as loans denominated in foreign currencies are converted at a weaker exchange rate at month’s end, which increases the value of the rupee.
Banks raise deposits and lend to the Government via Treasury Bills and Bonds, which allows them to produce a useful margin at a significantly reduced credit risk.
However, since June, Banks have also noticed a slowdown in the amount of deposits entering the system as market liquidity conditions tighten and hyperinflation hits people’s real wages.
Consumer prices in the Colombo area increased by a record-breaking 55% in June, while food costs increased by 80%, demonstrating that money has no longer any value in Sri Lanka.