Private credit growth dips to 19-month low in June
In November 2021, private sector loan growth was recorded at 10.11%
Private sector credit growth continued to decline for the seventh consecutive month, with a year-on-year growth rate of 10.49% this June – the lowest in 19 months, amidst a declining trend in imports owing to the ongoing dollar crisis and liquidity stress in banks.
In November 2021, private sector loan growth was recorded at 10.11%.
Data obtained from the central bank indicate that there had been a steady upward trend in private credit growth from mid-2021 to November last year. But, since then, the growth rate has experienced a consistent downward trend for seven consecutive months, presenting an unprecedented scenario within the banking sector.
This falling trend in credit growth implies that the economy is in a slowdown mode and may not recover in the immediate future, banking experts have observed.
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Mohammad Ali, managing director and CEO of Pubali Bank, told The Business Standard, "Ours is an import-dependent country. The opening of import letters of credit (LCs) in banks has reduced much compared to earlier. Post-import finance, which is involved with imports, has also decreased. That is, the trade loans given by the banks in these cases are decreasing. Consequently, the overall credit growth in the private sector has been decelerating."
Furthermore, the decrease in the opening of LCs for capital machinery imports has led to a decline in new investments in the country, further compounding the situation, he maintained.
Central bank's data reveal that the total value of import LCs opened in June amounted to $4.75 billion, which was the lowest in a single month in FY23.
Comparatively, FY22 witnessed a total of $94.27 billion worth of LCs opened, which dropped by 27% to $69.36 billion in FY23.
"The instability in global trade and the lack of political stability within the country have instilled caution among investors, leading to hesitancy in making new investments. Consequently, banks are also wary of opening new LCs," said Mohammad Ali.
He also cited the inadequate amount of foreign investment in the country as a contributing factor, emphasising the crucial role of political stability in sustaining a robust economy.
Currency devaluation has also played a significant role in the decline of imports and the subsequent decrease in loan growth, said sector insiders.
Over the past year, the Taka has been devalued by Tk15.6, equivalent to 16.64%, from Tk93.45.
In response to the challenging economic situation, the central bank has announced its monetary policy for the first half (Jul-Dec) of fiscal 2023-24 adopting a contractionary monetary policy stance tightening money flow to the private sector and lowering the private sector credit growth projection to 11% for FY24 from the previous target of 14.1% set for FY23.
Emranul Huq, managing director and CEO of Dhaka Bank, told TBS that the continuous decline in private sector credit growth over the past few months is signalling a possible slowdown in the country's economy.
The economic impact of the global situation has contributed to this decline, and major government projects' slower implementation has further exacerbated the situation, leading to a decrease in credit demand, he observed.
Additionally, both government and private sector projects scheduled to begin in the near future have been delayed due to the prevailing circumstances.
Stating that liquidity in the banking system has been affected due to the government's borrowing from the banking sector, Emranul said, "Generally, if the liquidity situation is good, banks are ready to give out loans. The banks' liquidity is now in a slightly stressed scenario, so they are not able to disburse credit that way. That is, the demand and supply sides of credit are in tension everywhere."
In FY23, the government borrowed Tk1,22,980 crore from the banking system, with Tk78,140 crore provided by the central bank. The government took Tk25,296 crore from commercial banks.
Emranul Huq highlighted that banks are hesitant to provide loans to new projects due to the rising costs of energy, including fuel and electricity, which have increased the production expenses for traders. However, he acknowledged that the private sector credit growth remains in an acceptable condition considering the current circumstances.
One of the concerning trends in the banking sector is the increasing rate of classified loans, which has made banks cautious about disbursing large loans.
As of March 2023, the total defaulted loans in the banking sector amounted to Tk1.32 lakh crore, accounting for 8.80% of the total outstanding loans, a slight increase from Tk1.21 lakh crore in December last.
In the monetary policy statement for the first half of FY24, the central bank reported that the private sector credit growth during the January-June period was mainly influenced by higher domestic and international commodity prices and a significant depreciation of the Taka against the US dollar.
The rebound of economic activities following the recovery from the Covid-19 pandemic also played a crucial role in the growth of private sector credit, given the lower demand for import financing.
