Central Bank imposed lending restrictions will start to severely impact growth and profitability of small and medium sized banks and raise borrowing costs for subprime customers during the rest of the year.
Weak economic management, disappointing foreign investment flows and an exchange rate pegged to the dollar caused a balance of payments crisis this year. The eventual fallout was exacerbated by Central Bank policy of continuing to hold the peg against the dollar and reluctance to hike interest rates. Borrowers, especially subprime ones, are likely to face higher interest rates during the rest of the year as the restriction on bank lending begins to affect smaller banks of which they are customers. Many small and some medium sized banks are closing in on their allowed 18% credit expansion for the year and they are now seeking the highest possible yield on relatively little lending they are able to grant.
Depositors may find diminished interest among small commercial banks for their money. However the credit ceiling is driving business to specialized finance and leasing firms, also mostly catering to subprime borrowers, which haven’t been slapped any restrictions on expanding lending. The effect on the banks themselves is more devastating. Most small and medium sized banks had budgeted growth in the region of 40% for this year and had already invested in the resources like branches, people, systems and new products to make that possible.
Even Sri Lanka’s biggest bank by assets, BOC had budgeted 23% credit growth which is still within limits because the bank raised $500 million through an international bond. “Credit demand has slowed down,” points out DFCC Chief Executive Nihal Fonseka who says they may still expand credit at over 20% this year. DFCC Vardhana Bank, its commercial banking units, lending growth plan of 40% has however been significantly disrupted.