Private credit growth plunges to 11-month low of 12.14% in Feb

Infographic: TBS

Bangladesh's private sector credit growth in February this year was the slowest in eleven months mainly due to a massive drop in imports and tumult in the world economy. 

According to the Bangladesh Bank's data, private sector credit growth dips to 12.14% in the February of 2023 from 12.62% in January 2022. The growth stood at 12.29% in March last year.

Emranul Huq, managing director and CEO of Dhaka Bank, told The Business Standard, "Growth in private sector credit sees an upward trend when production goes on in full swing. There are several reasons for the slowdown in our private sector credit growth and one most prominent among them is that our imports have decreased over the last few months."

He said the Russia-Ukraine war has caused a major shift in global demand for goods, causing factories to cut production.

Apart from this, due to the massive fall in the value of the taka against the US dollar compared to the local currencies of other countries of the world, there has been a liquidity and dollar crisis in the country's banking sector. As a result, private sector credit has been affected, he maintained.

"Generally, capital machinery and raw materials have to be imported to start new industries. Now due to the dollar crunch in banks, imports have reduced a lot. Which has left a negative impact on the growth of private sector loans," Emranul Huq further added.

Opening of import letters of credit (LC) plummeted by around 25% in the first seven months of FY23, according to Bangladesh Bank data.

LC opening in the July-January period of the current fiscal year was $39.46 billion, down by $13 billion from that of the same period of FY22, the central bank's data show.

The latest Bangladesh Bank data show imports of capital machinery, consumer goods, intermediate goods, and industrial raw materials except petroleum have fallen substantially in the July-January period.

LC opening for capital machinery was $1.41 billion in the first seven months of the current fiscal year, down from $4.25 billion during the corresponding period last year.

The private sector credit, which grew to 14.07% in August last – close to the monetary target of 14.1% set for the current fiscal year, dropped to 13.93% in the following month. Credit growth in the next month was 13.91%, according to Bangladesh Bank data.

Zahid Hussain, a former lead economist of the World Bank's Dhaka Office, told The Business Standard that One of the reasons for the low demand for private sector credit is that no one wants to increase production in the present turbulent global market.

He further said that private sector credit growth in the country was in an upward trend till June last year because at that time the prices of commodities in the world market were very high. Now that the prices of many commodities have fallen, the growth of import-dependent credit has slowed down, he added.

The managing directors of two other private banks said on condition of anonymity that apart from the decrease in imports, the liquidity crisis in the banking sector is another major reason for the recent dip in private credit growth.

They said that most of the Islamic banks are facing a liquidity crisis in the wake of the uncovering of major irregularities in loan disbursements by a few of them. 

These banks are giving importance to deposits with the central bank to comply with the statutory liquidity ratio (SLR) and cash reserve ratio (CRR) requirements. This is because if they cannot maintain the prescribed amounts, they will be fined.

According to Bangladesh Bank's Quarterly Scheduled Banks Statistics report, the deposits of Islamic banks have decreased significantly. Deposits of Islamic banks dropped to Tk3,55,000 crore at the end of December last, which were Tk3,61,000 at the end of the June quarter of 2022.