ECONOMYNEXT – Bad loans at Sri Lanka’s banks, measured as ‘Stage 03’ loans to total loans and advances expanded by 0.5 percent to 13.7 percent in the second quarter of 2023, central bank data shows, which is a slower pace than the previous three quarters.
Bad loans went up 1.9 percent in the September 2022 quarter, and 1.0 percent in the December quarter and 1.3 percent in the March quarter, as debt moratoria also ran out.
In Sri Lanka and other countries, large spikes in bad loans are usually ‘hangover’ of macro-economic policy deployed target growth.
Amid a stabilization effort, credit can also contract, making the bad loans bigger.
Sri Lanka’s bad loans usually spike after period of credit growth re-financed by printed money (reverse repo injections made to artificially target a call money rate), and not real deposits, which then trigger balance of payment deficits which require steep spikes in rates to restore monetary stability.
Sri Lanka economic bureaucrats cut rates with the printed money in the belief that there is a growth shortcut by cutting rates to target real GDP, which has led to external crises since a central bank was set up in 1950.
However, policy worsened after 2015 when the International Monetary Fund taught the country to calculate potential out and dangled the number in front of a central bank which had taken the country to the agency multiple times after running down reserves.
In December 2019, inflationists also cut taxes on top of rate cuts, deploying the most extreme Cambridge-Saltwater macro-economic policy ‘barber boom’ style with predictable results.
When rates are hiked to restore monetary stability, bad loans rise and a currency collapse destroys purchasing power of the consumers and sales of firms which had taken loans.
When central banks cut rates with liquidity injections bad loans also go up in floating rate regimes (the housing bubble), but balance of payments are crises are absent. (Colombo/Sept29/2023)