May 19, 2014 / 9:56 AM / 3 years ago

Sri Lanka's c.bank: private credit will pick up in H2 to expected level

* Credit growth to be on the expected path through 2016-governor

* Fall in gold pawning results in sluggish credit growth

* Central bank not unduly concerned over low private credit

* February private credit growth at lowest since May 2010

By Shihar Aneez

COLOMBO, May 19 (Reuters) - Sri Lanka's private sector credit growth will pick up to around 15 percent by the end of this year and continue to improve through 2016, the central bank governor said on Monday amid concerns over sluggish loan growth.

The $67 billion economy's private sector credit grew 4.4 percent year-on-year in February, the slowest expansion since May 2010, data showed.

That compared with growth of 5.2 percent in January and 13.3 percent in February 2013.

The central bank has aimed for 14 percent private sector credit growth by end 2014 and 15 percent next year to spur economic growth to 7.8 percent this year and 8.2 percent in 2015.

Central Bank Governor Ajith Nivard Cabraal said the sluggish growth was mainly due to a slowdown in credit linked to gold pawning after a sharp fall in gold prices.

"That issue has now been addressed by banks, and in the meantime, credit to other sectors has been picking up. Hence, we are not unduly concerned," Cabraal told Reuters ahead of the central bank's monetary policy announcement on Tuesday.

"We expect credit growth to be at the expected levels in the second half and to continue on the expected path over the next couple of years. Such credit growth of around 15 percent per annum will be sufficient to deliver around 7 to 8 percent real economic growth with inflation also stabilizing within mid single digits," he said.

Credit growth slowed to 7.5 percent by end 2013, much lower than the targeted 18.5 percent despite the central bank slashing its key monetary policy rates by 125 basis points between December 2012 and October last year to boost economic growth.

The central bank is widely expected to keep key rates unchanged on Tuesday.

Some banks and currency dealers say that despite multi-year low policy rates they do not see much demand for imports and borrowing for investments, as consumer spending is declining due to higher taxes and lower disposable income.

The island-nation's imports also have been on a declining trend, data showed.,

Although credit growth was slow, economic growth picked up to 7.3 percent in 2013 from a three-year low of 6.3 percent in the previous year, thanks for massive state-led infrastructure projects started after the end of a 26-year civil war in 2009.

Lending rates against gold under pawning increased by 116 basis points to 18.67 percent by end 2013 from a year earlier, reflecting increased risk of pawning-related lending following a decline in international gold prices during the year.

That hit the growth in pawning-related loans, which fell 13.7 percent to 292.9 billion rupees ($2.25 billion) in 2013 compared to the previous year.

Sri Lankan authorities took strong measures including a 10 percent tax on gold imports to prevent overseas purchases by traders looking to take advantage of a favourable price arbitrage with top consumer India. ($1 = 130.3500 Sri Lanka Rupees) (Reporting by Shihar Aneez; Editing by Kim Coghill)

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