* March credit growth slows to 4-year low of 4.3 pct y/y
* C. bank to provide guarantee on pawning loans to boost credit
* Credit growth on the decline since March 2012
* Sri Lanka aims 7.8 pct GDP growth this year (Adds quotes, details)
By Shihar Aneez and Ranga Sirilal
COLOMBO, May 20 Sri Lanka's central bank kept policy rates steady for the fourth straight month at multi-year lows on Tuesday, as forecast, and said it expected to introduce a new guarantee scheme for gold loans to boost credit growth that hit four-year low in March.
The repurchase rate and reverse repurchase rate were left at 6.50 percent and 8.00 percent, respectively, as most analysts in a Reuters poll had forecast. In January, Sri Lanka reduced the reverse repurchase rate by 50 basis points.
Private sector credit grew 4.3 percent year-on-year in March, according to the latest central bank data, its slowest expansion since May 2010. That compared with growth of 4.4 percent in February and 10.9 percent a year ago.
The central bank said repayments to offshore creditors by companies under the Board of Investment, which handles foreign direct investment, "dampened the overall credit growth," in March, while a sharp decline in borrowing from pawnbrokers was largely behind continued low private sector credit growth.
The central bank said it has approved a credit guarantee scheme on pawnbrokers' loans to counter the effect of the continued decline in pawning advances on productive sectors.
"Gold pawning loans have been traditionally for agriculture. So the government will provide a guarantee for the banks, taking some of their risks, on pawning loans," central bank governor Ajith Nivard Cabraal told Reuters.
Borrowing from pawnbrokers is about 12 percent of total lending and the main source of credit in the agriculture sector. About 70 percent of Sri Lanka's population is rural.
On Monday, Cabraal said private sector credit growth will pick up to around 15 percent by the end of 2014 and continue to improve through 2016.
CREDIT DOWN, GROWTH UP
The private sector credit growth has been on a declining trend since March 2012 when it hit a record high of 35.2 percent before the central bank took several tight monetary policy measures to curb excess credit growth.
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.
Despite lower credit growth, economic growth picked up to 7.3 percent in 2013 from a three-year low of 6.3 percent in 2012. The central bank projects 7.8 percent growth this year.
The central bank cut the repurchase rate by 125 basis points and reverse repurchase rate by 175 basis points between December 2012 and January 2014 to stimulate economic growth.
But with the repurchase rate and reverse repurchase rate at 6.50 percent and 8.00 percent, commercial banks' lending rates are high at around 14 percent.
The central bank said there was further room to cut long-term lending rates and said it expected commercial banks to pass the benefit of the eased monetary policy stance to borrowers "without further delay".
The bank also said inflation is projected to remain benign in the months ahead, supported by favorable expectations although "weather-related supply disruptions could cause some marginal variation in the behavior of certain food items." (Editing by Eric Meijer)