Sri Lanka slides deeper into directed lending, extending Mahinda Rajapaksa legacy

ECONOMYEXT – Sri Lanka’s economic policy slid deeper into state interventionism and away from the ‘social market economy’ that was promised, as a budget proposal directing banks to lend to specific sectors was given effect, taking forward a legacy of ex-President Mahinda Rajapaksa.

The Central Bank directed banks to lend 10 percent each to small and medium enterprises, exports and tourism.

Banks also have to lend 5 percent each for youth and women.

Banks also have to lend at least 15 percent of the deposits in the same area. Banks should provide loan of less than 5 million in one month and keep one branch open in each district for seven days.

Lending to agriculture will remain at 10 percent.

Banks were directed to lend to agriculture during the rule of ex-President Mahinda Rajapaksa. But now it has deteriorated.

Directed lending, which is based on the supposed omniscience of politicians and bureaucrats, can squeeze credit to fast growing sectors, generate bad loans and lead to widespread credit mis-allocations.

Banks also cannot take decisions based on credit analysis but has to now satisfy political objective which can undermine the entire credit culture and promote imprudent lending to meet political targets.

Directed credit can go directly against the overall mandate of the central bank to keep financial stability by encouraging bad credit culture and mal-investments.

Directed credit was feature of Jawaharlal Nehru’s 5-year plans, which were based on Soviet Gosplans, that condemned India into a ‘Hindu rate of growth’ and eventual economic collapse in 1991, which led to de-regulation of the economy.





Analysts say the central bank has wording that could possibly allow banks to continue to engage in prudent lending.

During the last regime, then-Governor Nivard Cabraal was credited with helping save the banking system, especially banks that do not have the skill and the reach to provide agricultural credit, from later suffering bad loans by allowing a liberal classification. (Colombo/Feb03/2017)

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