Household sector credit expanded during the first half of 2024 according to the Central Bank Lanka Financial Stability Review for the Year 2024.
The growth of the Household sector credit, which remained negative during 2023, turned positive in the first half of 2024 with increased demand for credit from the sector reflecting the gradual recovery in economic activities.
Household sector credit, which represents 41.3% of the total formal financial sector, recorded a modest growth of 2.5% by end Q2 of 2024, compared to the 6.0% decline recorded in the corresponding period of the previous year.
Further, the Banking sector alone disbursed Rs. 736.4 billion new credit facilities to households during the first half of 2024, a substantial increase from Rs. 412.1 billion credit issued in the corresponding period of the previous year.
Similarly, Non-bank financial institution (NBFIs) also recorded a notable uptick in credit issuance over this period. Heightened consumer confidence with improved economic conditions led households to feel more secure in their financial management and consequently, to increase their appetite for borrowings.
Comparatively, low interest rates and increased willingness to lend made borrowings more attractive, encouraging households to borrow for both consumption and investment purposes.
The Banking sector played a significant role in meeting the borrowing needs of the Household sector, representing 67.9% of the total credit issued to households while NBFI sector accounted for the remaining portion of the loans obtained by households.
Moreover, an increase in the share of credit granted to the Household sector by NBFIs was observed by end Q2 of 2024 compared to Q2 of 2023.
It was also observed that the Non–Performing Loan (NPL) ratio declined with the gradual economic recovery
Rupee strengthens against USD
The Rupee strengthened against the USD during the first eight months of 2024 due to improved inflows and controlled outflows. Increased worker remittances, earnings from tourism and conversion of export proceeds helped to ease the pressure on the rupee value against the USD during the year thus far.
The sharp appreciation of the rupee witnessed in the first four months of the year decelerated with increased imports due to recovering economic activity and continuous net outflow of foreign investments in Government securities.
However, the pressure on the rupee decreased with the receipt of IMF funding in June 2024. Since then, the USD/LKR exchange rate movement has shown less volatility. Overall, year-to-date appreciation of the rupee against the USD was 7.9% at end August 2024.
Going forward, there are several concerns that could affect demand and supply conditions in the domestic foreign exchange market. The anticipated gradual pick up of import demand due to economic recovery amid the relaxed monetary policy stance and the relaxation of restrictions on vehicle imports will exert pressure on the rupee unless this outflow requirement is compensated by increased inflows, especially by long-term oriented foreign direct investments.
If the geo-political tensions, particularly in the Middle East, escalate, it would affect inflow of worker remittances and expenditure on fuel and trade.
