Sri Lanka Gold-Loan Fall Masking Credit Increases to Industry…

Sri Lanka’s banks are lending money to industry and services, but the total loan stock is not growing fast because of contracting gold loans, Deputy Central Bank Governor Ananda Silva said.

From a peak in 2012, gold loans have slumped 156 billion rupees so far, Silva told a business forum organized by DFCC Bank’s Treasury.
Credit to private business fell in the first two months of 2014 in absolute terms. But in the 12 months to February the credit stock was up by 104 billion rupees.

Sri Lanka is recovering from a balance of payments crisis triggered by bank credit to finance energy subsidies and in the recovery period, deleveraging is usually seen.

Silva said in March private credit rose by 7.5 billion rupees but the actual rupee lending was higher because there were repayments by export oriented firms, who were probably seeing positive cashflows due to a pick-up in exports.

Not counting gold loans, loans to industry was up by over 200 billion rupees over the past year, he said.

The Central Bank wanted to see about 350 billion rupees in private credit this year, but so far it was below expectations, Silva said.

The Central Bank gave a partial credit guarantee to banks to lend against gold, which is expected to boost loan values to about 80 percent of collateral from around 65 percent.
Bank became shy of gold loans after prices fell from 1800 US dollars an ounce to around 1300 dollars an ounce as Fed loose monetary policy reduced somewhat, bursting a precious metal price bubble.

Gold bears expect the metal to fall to about 1000 US dollars an ounce over the next 12 months if Fed tapering continues and speculators cut their holdings.

Silva said banks had invested heavily in Treasuries, pushing their rates down, as credit to private sector was curtailed.

Rates to prime customers who had more bargaining power had fallen.

Silva said rates charged from smaller non-prime customers were higher, and long term rates were still high.

He said instead of preserving high margins, banks should perhaps look at boosting volumes from smaller customers.