Although private sector credit growth has not yet reached desired levels, the Central Bank remains hopeful that the pace will improve alongside economic recovery and the easing of credit conditions, supported by lower interest rates.
Despite the Central Bank’s dissatisfaction with the speed of credit growth to the private sector so far this year, it noted that credit growth has been consistently positive since June last year, except for January, which was an anomaly.
The Central Bank highlighted a significant decline in market lending rates, especially for shorter tenures. However, it noted that there is still some room for long-term rates to decrease further.
The Central Bank expressed satisfaction with the prime lending rate, now at a single-digit level of 9.68 percent, which has led to increased credit flows to prime customers for shorter tenures. At the beginning of the year, the prime rate stood at 12.13 percent.
Data from the Central Bank indicates that banks lend between Rs. 40-50 billion in credit under the prime rate, including daily roll-over loans and loans maturing within a week.
The prime rate serves as the benchmark rate for banks lending to their most creditworthy customers, primarily for terms less than three months. Meanwhile, the average new lending rate for small businesses currently ranges from 12.0 to 12.50 percent.
The Central Bank aims for these rates to soften further, noting that it’s just a matter of time. Regarding loans to small businesses, the Central Bank acknowledged a slow recovery in loan disbursements, attributing this to a lack of demand rather than a reluctance to lend. Many small businesses are still in recovery mode after prolonged downturns and are expected to see increased loan demand as they enter the growth and expansion phase of their business cycle.
Analysts caution that the Central Bank should avoid excessive rate cuts, which could harm banks by narrowing their margins. The Central Bank should strike a balance in adjusting its policy rates to support the economy, manage inflation expectations, and ensure the sustainability of banks’ lending activities with adequate margins.
The current lending rates, even for small businesses, are highly favorable and should attract only genuine small business borrowers.
