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Sri Lanka 2017 budget in subsidized credit push; housing loans below policy rate

ECONOMYNEXT – Sri Lanka’s budget for 2017 has proposed multiple subsidized credit programs including 370 billion rupees of long term housing loans at 7.0 percent, below the country’s main policy rate as the central bank tries to reign in private credit stabilize the economy.

The proposed housing credit at below the reverse repo rate of 8.50 percent at which the central bank injects money to the banking system.

The proposed 25-year loan at 7.0 percent is also 500 basis points below the 10-year Treasuries which are now trading at around 12.00 percent.

The budget for 2017 said state-run banks will give the loans, but did not say all the credit will be boosted in one year.

"The National Savings Bank (NSB) together with the new Housing Bank will provide a loan facility for potential home owners at an all-inclusive rate of 7 percent with a tenure of 25 years," the text of the budget for 2017 said.

"NSB will raise around Rs. 370 billion to provide such loans."

The budget also said foreigners will be allowed to borrow from domestic banks to buy apartments a move that could fire a credit and import boom and further worsen balance of payments trouble (apartments are built with imported materials), analysts say.

The moves come as early signs of a housing bubble is emerging and some banks are going slow on loans for condominiums to prevent an unsustainable housing bubble.

Finance Minister Ravi Karunanayake also proposed a bewildering array of subsidized credit schemes for anyone ranging from university graduates to flower growers, with taxes taken from the people.

The businesses are getting the subsidies as value added tax was slammed on healthcare.

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The budget said said 1.000 million rupees of tax-payer funds will be given to provide loans at half the market rate to owners of houses below 750 square to extend their dwellings.

One thousand university graduates who are starting up businesses will be given 10-year loans to start up business with zero interest credit.

The budget also proposed allocated 7.0 billion rupees to give interest free loans to handicraft makers, mushroom growers and flower growers island-wide.

Organic fertilizer makers will given loans up to 15 million at a 75 percent interest subsidy, he said.

A 50 percent interest subsidy will given to farmers and farmer organizations that engage in agro-processing. The budget set aside 50 million rupees for the project.

A 50 percent interest subsidy will be given to those starting floriculture nurseries and 50 percent interest subsidy will be provided for ornamental fish famers.

More concessionary loan schemes were announced for small and medium industries by the Ministry of Finance (750 million rupees allocated) and a credit guarantee scheme also by the Ministry of Finance (500 million).

A 50 percent interest subsidy will be given for promoting electric cars as taxis (200 million rupees) and 150 million rupees would be set aside to give 7 percent interest subsidy to upgrade school vans.

None of these schemes however is as big as the housing loan programme at 7.0 percent, which economic analysts say could fire a property bubble depending on the period of disbursement.

The moves come as the Central Bank tries to put the brakes on private credit and stabilize the economy.

The budget also proposed slashing the amount of loans that could be loaned to buy cars to 50 percent of value and to three wheelers to only 25 percent, a move that had to be implemented by the Central Bank.

The budget also proposed ending a scheme where Employees Provident Fund, a pension fund of private workers allows members to borrow against their balances to build a house.

"…I propose to discontinue the provision of loans to members by the EPF with immediate effect," the speech said.

"However, members may obtain loans through the many housing loan schemes designed by our government."

Out of the blue banks were also directed to up their capital to 20 billion rupees, which analysts say could put smaller commercial banks in tight spot and fire a credit boom if they could raise the funds.

However the capital rule also requires central bank sanction.

In more interventions on banks, a multi-pronged directed credit program in the style of a Soviet Gosplan or India’s 5-year plans that filled state banks and produced a Hindu growth rate style was proposed.

"I also direct banks to ensure that at least 10 percent of their lending portfolio is for Agriculture, 10 percent for SME, 10 percent for Exports, 10 percent for Tourism, 5 percent for Youth and 5percent for Women," the budget speech said.

"I further direct the banks to lend at least 15 percent of the deposits within the same area for business development."

The interventions come from an administration that claimed to start a ‘social market economy,’ in the country. (Colombo/Aug12/2016)

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