Central Bank to loosen grip, slowly



The Central Bank said it would reduce a 1 percent general provision on existing loans at the rate of 0.1 percent over the next five quarters, reducing the provision to 0.5 percent.

"This could release Rs. 8 billion to the banking sector, considering the present loans of the banking sector amounts to Rs. 1.6 trillion, and hopefully they would lend," Central Bank Governor Ajith Nivard Cabraal told journalists yesterday.

The 1 percent general provision on active loans was imposed on November 2006 to provide an extra capital cushion to the banking sector. When this was announced, the private banking sector objected to the move saying it would hamper their ability to lend and generate profits.

"In November 2006, there was some instability in the financial system and this provision was required. But now we feel it could be relaxed, but we will do this in stages beginning from the quarter ending December 31, 2010," he said.

Low private sector credit growth is worrying the government and the IMF has also warned that credit growth at current levels would not be enough to sustain 7 to 8 percent economic growth.

Data from the Central Bank showed that bank loans to the private sector had grown 9.5 percent for the first seven months of this year to Rs. 1,138.5 billion from Rs. 1,040.1 billion a year ago.

Government borrowings from the domestic banking sector grew by 13 percent to Rs. 472.1 billion from Rs. 418.8 billion the previous year while credit to public corporations increased by 99 percent to Rs. 79 billion from Rs. 39.8 billion the previous year. However, the Central Bank believes the government would reduce its domestic borrowings in times to come.

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