Sri Lanka firms get nod to borrow US$335mn from abroad

Apr 09, 2014 (LBO) - Sri Lankan firms have got the nod to borrow 335 million US dollars abroad 2013 by the Central Bank, while debt markets also supplanted bank loans in 2013, as commercial bank credit to private firms slowed, an official said.

Swarna Gunarathne, head of economic research at Sri Lanka's Central Bank said its exchange control department under a scheme of approving foreign loans of 10 million US dollars or greater had given the nod to 335 million dollars worth foreign loans.
Private firms borrowed 175.9 billion rupees from commercial banks in 2013, up 7.5 percent from a year earlier but down from 19.1 percent in 2012.

The rupee banking system was recovering from a balance of payments crisis triggered by high loans growth accommodated with central bank credit in 2011 and 2012.

The crisis was halted with a hike if fuel prices which reduced state bank credit for fuel subsidies, a rise in interest rates and a floating of the rupee, which ended 'sterilized' or central-bank-credit-accommodated foreign exchange sales.

Alternative Funding

Growth in Sri Lanka's credit to business from commercial banks slowed to 7.5 percent or 175.9 billion in 2013 from 19.1 percent a year earlier, as the country recovered from the crisis.

Gunarathne said private firms had also borrowed 69 billion rupees from debt markets.

"This shows that private firms were borrowing through alternative mechanism rather than straight banks loans," Gunarathne told businessmen and officials as the annual report on the economy by the Central Bank was released.

There was as surge in the issued of listed debt in 2013 after yields were made tax free by the state.

Some firms paid off bank debt with 4-year fixed rate debt raised from capital markets and banks themselves were the biggest buyers of the securities, especially highly rated ones.

Though banks were still funding the firms, the accommodation would be listed in the balance sheet under securities holdings rather than loans to customers.

Pawning Bubble

But Gunaranthe said the biggest reduction in credit was in the gold-backed loan or 'pawning' segment as banks slashed lending.

There had been a surge in gold backed loans as gold prices rose sharply in the wake of Federal Reserve money printing, along with oil and other commodities, as the US dollar weakened in real terms but started to tumble in 2013 with so-called 'tapering' of its activities.

Some gold bears are forecasting the metal at around 1,000 US dollars an ounce by the year-end from the current 1,200-1300 dollar range, though an escalating crisis in Ukraine may provide support for higher commodity prices, including gold others say.

Gold was only 20 dollars an once before the Federal Reserve was created eventually leading to un-backed fiat money and sustained inflation was unheard of in the world.

As gold prices fell customers engaged mass defaults of gold backed loans, forcing banks to make large provisions and sending them scrambling to reduce gold-backed loans.

Gunarathne said banks had still increased their loans to industrial and service enterprises by over 200 billion rupees in 2013.

De-leveraging

Analysts say it is important to allow for a period of de-leveraging which is a part of the so-called 'business cycle' where banks and private borrowers can purge bad credit in the system that were built-up during the bubble years of low interest rates and money printing.
Private firms that over-leveraged themselves with acquisitions and borrowings during the credit and economic bubble would also get an opportunity to reduce loans, raise equity funding or sell parts of the businesses to others who were less leveraged.

Analysts say in 2008/2009 balance of payment crisis and credit bubble bad credit built up around a property bubble in especially in the sub-prime non-bank lending sector as well as loans to state energy utilities to subsidize customers.

In the 2011/2012 it was seen in gold-backed loans and loans to fund subsidies by state energy utilities. Over 2013 state enterprises also repaid some of their credit, though a drought over the past quarter is reversing the trend.

The next could be in listed debt and foreign borrowings.

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