Private credit growth drops to 3.5-year low in November

Private sector credit growth in November 2024 fell to a 3.5-year low, decreasing by 66 basis points from October. This slowdown is attributed to weakened loan demand, a dearth of new investments, and a surge in investment in government treasury bills and bonds.

According to Bangladesh Bank data, the growth stood at 7.66% in November, the lowest since May 2021, when it was 7.55%.

This growth is well below the central bank's target. For the first half of FY25 (July to December 2024), the Bangladesh Bank set a lending target of 9.8%, slightly lower than last year's first-half projection.

"I do not view the slowdown in credit growth as too negative. It is a temporary situation," said Tanjil Chowdhury, chairman of Prime Bank Ltd and managing director of East Coast Group.

"The focus should be on the proper utilisation of loans rather than just loan growth. The export sector is performing well despite recent instability, which bodes well for the overall economy," he said, adding that banks' lending ability was affected by stricter loan classification criteria.

"To meet IMF conditions and enhance transparency in the banking sector, the central bank has revised the criteria for classified loans. This has led to an increase in classified loans, higher provision requirements, reduced bank profitability, and a decline in the availability of loanable funds. Hence, banks are now more cautious in lending," Tanjil said.

Abul Kashem Md Shirin, managing director and CEO of Dutch-Bangla Bank Ltd, highlighted multiple factors for the slowdown in private sector credit growth.

"We are not witnessing a surge in new investments among businesses. In fact, the financial situation of some businessmen has deteriorated recently. The demand for retail and SME loans has dropped due to high inflation. Small businesses are not willing to increase their loan burden further now," he told TBS.

"Furthermore, a shortage of adequate deposits has weakened the lending capacity of certain banks, which is affecting the entire industry," Kashem said. 

Private credit remains largely unaffected by the central bank's policy rate hike, noted the seasoned banker. "Interest expense is just one factor; the broader business environment, including energy connectivity and employee wages, plays a bigger role. Credit growth was higher even when rates were higher," he said.

Kashem added that banks are favouring treasury bills and bonds over private sector loans due to their safety and attractive returns. "Without a significant rise in import-related letter of credit openings, credit demand remains modest," he added.

Bangladesh Bank data shows LC openings rose by 14.48% in October and 5.27% in November, after a 7% decline during the first quarter (July-September) of FY25.

How to redirect credit flow to the private sector?

Tanjil Chowdhury suggested reducing LC margins for essential goods to zero to stimulate credit growth. "Luxury goods consumption should be curtailed, requiring a shift in consumer behaviour for the nation's benefit. Additionally, scaling back less critical large development projects can lower government expenses, enabling greater focus on enhancing productivity in agriculture and industries," he said.

The Prime Bank chairman also urged prioritising SME and supply chain financing.

Abul Kashem Md Shirin expressed confidence in the economy's natural recovery, stating, "There is no need to raise the policy rate in the coming months. The current central bank governor, an experienced economist, aims to reduce inflation by June 2025. Additionally, the dollar crisis has significantly eased, and once fully resolved, business and trade will rebound."

On back-to-back LCs for raw material imports, he said, "Some non-exporting firms opening large LCs face challenges sourcing dollars. However, back-to-back LCs are operating smoothly. With steady remittance inflows, the economy is poised to stabilise gradually."

According to central bank data, merchandise exports posted a 15.63% year-on-year increase in November, earning $4.11 billion. Improved foreign exchange availability further supports the recovery narrative.

Remittance inflows have also surged, reaching nearly $27 billion in 2024, a 22% year-on-year increase. This growth was driven by a 9% rise in the official dollar rate and a crackdown on money laundering in the year's final five months since August.

However, food inflation in Bangladesh surged to 13.8% in November, increasing from 12.66% in October, according to the latest data from the Bangladesh Bureau of Statistics (BBS).

The rise in food prices has also contributed to an uptick in the country's general inflation, which reached 11.38% in November, up from 10.87% in October.