BB tightens grip as private credit growth jumps three-year high

Private sector credit growth sees a big jump in April, marking a three-year high, mostly backed by import financing and rising credit demand amid business expansion in the post-pandemic recovery period.

The credit growth rose to 12.48% year-on-year in April from 11.29% in the previous month.

However, the growth rate is still far lower from the monetary ceiling of 14.8% set for the current fiscal year by the Bangladesh Bank.

The Bangladesh Bank, in its new monetary policy for the next fiscal year, will tighten money flow by cutting down credit growth ceiling to curb inflation – in line with many other central banks across the world.

The decision to curb money flow was taken in a monetary policy committee meeting held on Sunday at the Bangladesh Bank headquarters.

In the meeting, the central bank also revised the repurchase agreement (repo) rate to 5% from existing 4.75% to make money costlier for banks to curb inflation.

A repurchase agreement is a form of short-term borrowing for dealers in government securities.

In the year 2020, the central bank revised down the repo rate to ease money flow during the pandemic. 

Earlier in April 2019, the credit growth was above 12% but it remained sluggish throughout the year amid lending rate cap discussion. Finally, the lending rate cap was implemented from 1 April 2020 when the country was also going through the Covid-19 pandemic.

As a result, the banking sector experienced a slump in investment causing downward credit growth.

However, private sector credit growth came back to pre-pandemic level in November last year, thanks to strong rebound in economic activities from pandemic-induced stresses.

Credit growth is good enough now, said Md Arfan Ali, managing director of Bank Asia.

He said new investments are coming amid rising demand. Moreover, import financing increased due to high prices in the global commodity market resulting in a surge in credit growth.

Banking sector is already feeling liquidity pressure amid rising credit demand but the liquidity position is still well, said Arfan Ali.

"The credit growth, which is still below the monetary target, will see a jump in the coming months," he predicted.

Amid rising credit growth, the banking sector is experiencing a decline in excess liquidity. Moreover, the dollar sale by the Bangladesh Bank also put pressure on liquidity in the banking system.

The central bank has sold $5.5 billion dollars since August last year until 19 May, through which the authority mopped up around Tk50,000 crore from the market.

In total, excess liquidity declined by Tk31,000 crore in seven months from its highest level of Tk2.31 lakh crore in August last year to Tk1.99 lakh crore in May this year, according to the Bangladesh Bank data.

While banks are still in the comfort zone in terms of liquidity, they have become more conservative in lending due to fears of a liquidity crunch in the future, said industry insiders.

The high import growth mostly contributed to private sector credit growth picking up.

The import growth registered 43.86% year-on-year in July-March quarter of the current fiscal year, according to the Bangladesh Bank data.

The Bangladesh Bank has recently tightened import policy to discourage imports of luxury items.

Bangladesh Bank Governor Fazle Kabir has called upon bankers to discourage imports of luxury goods considering the current foreign exchange crisis and high inflation in the country.

"The country is now facing a new challenge about inflation and dollar rate. This is not a challenge for only the central bank but also for the whole banking community," he said at a function at the capital's Officers' Club on Saturday.

Though credit growth is on the rising trend, lending rate is still low at 7% to 8% in the banking sector. However, high inflation slowed down the deposit growth which may put pressure on banks to increase lending rate in near future. 

The weighted average lending rate in the banking sector was 7.34% in March, according to the Bangladesh Bank data. On the other hand, inflation increased to 6.29% in April when the weighted average deposit rate was still 4%.

The low return from deposits discouraged savers causing a slowdown in deposit growth to 9% in March which was above 12% in last year, central bank data shows.