Private sector credit growth slips to 21-month low

TBS Illustration

The private sector credit growth plummeted to a 21-month low in July as businesses and individuals curbed their borrowing from banks and financial institutions, mainly due to reduced economic activities, tightened imports, and uncertainty surrounding the upcoming national elections.

According to data from the Bangladesh Bank, the last time private sector credit growth dipped below the current July figure of 9.82% was in October 2021, during the peak of the Covid-19 lockdowns, when it reached 9.44%.

The slow trend in credit growth continued, according to bankers.

Analysts caution that the decline in credit growth could lead to a decrease in investments. This, in turn, might prompt businesses to reassess their expansion plans, delay new project investments, or even make cutbacks in hiring and capital expenditures.

Traditionally, central banks use the credit growth rate as a pivotal indicator for making monetary policy decisions. When credit growth slows significantly, central banks often contemplate adjusting interest rates to stimulate borrowing and bolster economic activity. 

However, in the case of Bangladesh Bank, the recent removal of the lending rate cap at 9% has resulted in a subsequent increase in interest rates to over 10%.

Zahid Hussain, former lead economist of the World Bank's Dhaka office, attributed the lower credit growth to the lack of investment in the private sector.

"So far, we have been looking at reducing imports to maintain our reserves. Now we have to look at how to increase the foreign currency of the country. One of the ways is to reduce foreign currency market policing and leave it to the market," he told The Business Standard.

"Additionally, we should look at how to increase dollar support from foreign sources for the government. Besides, the government should take steps to increase foreign loans to the private sector," added the economist. 

According to data from the Bangladesh Bank, credit to the private sector at the end of July amounted to Tk14.85 lakh crore, compared to Tk14.94 lakh crore in the previous month.

Bangladesh's imports fell sharply in the immediate past fiscal year. Private and public entities opened letters of credit (LCs) of $69.36 billion in fiscal 2022-23, down 26% year-on-year from $94.26 billion, according to central bank data.

In the first 11 months of FY23, businesses opened $2.69 billion worth of LCs to import capital machinery, which was 55% lower year-on-year.

The LC opening for the import of industrial raw materials slumped 30% to $21.17 billion. The ratio of decline was 24% for intermediate goods, according to the Bangladesh Bank.

Md Arfan Ali, former managing director of Bank Asia, told TBS, "One of the reasons for slow growth in private sector loans was lower imports, which was a result of a decline in investment."

He said that due to the internal situation of the country and the liquidity crisis, investments in the private sector are decreasing. Besides, there was also uncertainty ahead of the upcoming national elections.

Arfan said the overall business sentiment of the country's market was negative.

"Many are waiting for the investment to increase if the internal uncertainty of the country is reduced," he said.

The senior banker said the credit growth trend has still remained unchanged in the following time.

Meanwhile, the July rate has also raised questions about whether the central bank's projected private sector credit growth rate of 10.9% July–December in the current fiscal year – down from 14.1% compared to last year – can be attained.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, pointed out that due to the global economic slowdown, demand for products in the international market has decreased.

"Additionally, because of the dollar crisis, the import of capital equipment and raw materials for various industries has significantly decreased, impacting private sector credit," he added.

The seasoned banker said loans to the private sector are not being disbursed as per demand due to the cash liquidity crisis in many banks, especially when buying dollars from the central bank.

"Moreover, non-performing loans are increasing, causing banks to be cautious in disbursing loans. This has had an impact on credit growth," he added.

"In addition, non-performing loans in banks are on the rise, so banks are cautious about disbursing loans. This has affected the credit growth."

At the end of March 2022, defaulted loans in the banking sector were at Tk1.03 lakh crore, which was increased to Tk1.31 lakh crore at the end of March this year.