Private sector loan growth dips for 6th consecutive month

Infographic: TBS

The private sector credit growth fell for the sixth consecutive month, reaching 11.1% in May, which witnessed the lowest growth in the last 15 months due to a declining trend in opening letters of credit (LCs) for imports, and the banks' conservative attitude toward loan disbursement.

Experts said the banking system has decent liquidity, but the private sector's demand for loans has decreased. Mainly the ongoing dollar crisis in the banks has reduced the import which has impacted the import financing.

Considering the downward trend in private sector credit growth in the last six months and aiming to tighten the money supply, the central bank has lowered the credit growth projection to 11% for FY24 from the previous target of 14.1% set for FY23.

According to the Bangladesh Bank data, the private sector credit growth rate witnessed a rising trend before reaching 13.97% in November last year. After that, it started dropping and stood at 11.28% in April this year.

Mirza Elias Uddin Ahmed, managing director of the Jamuna Bank, said, "Our new monetary policy has been made contractionary. At present, the private sector credit growth has slowed down due to the Russia-Ukraine war, and the inflationary pressure.

"The credit growth is very well connected with our imports. The import of industrial raw materials, capital machinery has decreased a lot this year compared to last year. So, import financing has also declined."

Asked if hiking the lending rate by 1% in the monetary policy for July-December period of FY24 will reduce the private sector's growth, the experienced banker said, inflation can be controlled by controlling the money supply by increasing the interest rate if the demand is pushed. The prices of imported capital machinery and other commodities have gone up a lot, resulting in a cost-push inflation. This cannot be controlled with the interest rate alone.

Along with this, one of the reasons for drop in imports is currency devaluation, which is also a reason for the decrease in the loan growth, he added.

Over the past year, the country experienced a currency devaluation of Tk15.4, equivalent to 16%, from Tk93.45.

Md Murshedul Kabir, managing director and CEO of the Agrani Bank, said, "Our loans for import financing have decreased, but the banks are increasing loan disbursement in sectors like CMSME (cottage, micro, small and medium enterprise), agriculture, and trade finance.

"Besides, the banks are now reducing their reliance on a handful of branches for loan disbursements. We have now increased loan disbursements through branches across the country."

Bankers said a rising trend in classified loans is discouraging the banks to disburse big loans. So, they are currently focusing on disbursing small loans, where the ratio of non-performing loans is low.

The total amount of default loans in the banking sector stood at Tk1.32 lakh crore in March, which was 8.80% of the total outstanding loans. The amount of default loan was Tk1.21 lakh crore in December last year.

"The banking sector's classified loans are increasing as compared to earlier times. Classified loans might have increased in the April-June quarter compared to the January-March period, I guess. This would be a challenge for us." said Mirza Elias Uddin Ahmed.  

Stating that the banks now scrutinise the loan applications more than they did before, the Agrani Bank managing director said, "If a loan application is properly reviewed, the chances of it becoming classified drop. The banks have become cautious in loan disbursements, because, if a loan is classified, the bank has to face many kinds of problems including keeping provisions." 

In the monetary policy statement, the central bank said the private sector credit growth in the January-June period of this year was mainly driven by higher domestic and international commodity prices, as well as significant depreciation of the taka against the 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.