Private sector credit growth hits 9-month low in December

Infographic: TBS

Private sector credit growth in December was the slowest in nine months mainly due to liquidity crisis in banks and a dollar shortage.

According to bankers, a slowdown in development projects also contributed to the drop in the credit growth.

According to Bangladesh Bank data, private sector credit growth dropped to 12.4% in December 2022 from 13.97% in the previous month. The growth stood at 12.48% in April.

Seeking anonymity, the managing director of a Sharia-based bank told The Business Standard that UPAS LCs are being deferred due to the dollar shortage in banks, and because of this, loans are not being given in local currency.

"Additionally, after purchasing dollars, banks experienced a liquidity crisis, resulting in a decrease in the amount of loan disbursements," he added.

According to the top banker, capital machinery must be imported in order to establish a new industry, and loans are given in this regard. 

"But let alone importing capital machinery, now we are not even able to import daily essentials. Therefore, the growth of banks' loans has slowed," he added.

UPAS LC refers to "Usance Payable at Sight LC". It is the combination of Usance LC and UPAS LC. When the agreement is made through Usance LC, the buyer will reimburse after a certain period of time after receiving the goods.

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

To preserve the country's reserves, the central bank has imposed strict restrictions on all types of imports except essential goods. In addition, due to the increase in the price of goods on the world market, the import costs have gone up a lot. It has resulted in a significant decrease in imports.

According to central bank data, there has been a massive decline in the import of capital machinery, industrial raw materials, intermediate goods, and consumer goods due to the dollar crisis in the country and instability in global trade.

The import of capital machinery in the July-December period of the current fiscal year stood at $1.27 billion, which was 65.32% less than imports involving $3.67 billion in the same period of FY22.

Consumer goods and industrial raw materials worth $4.12 billion and $1.20 billion, respectively, were imported during the first half of the current fiscal year, which was $4.69 and $1.65 billion, respectively, in FY22.

Emranul Huq, managing director of Dhaka Bank, told TBS that the central bank's repo rate is on the rise. Apart from this, many banks are taking three-month term loans at 9% interest from the call money market for a short term.

"However, the central bank has kept the rate of all loans except consumer ones at 9%. As a result, banks are no longer able to profit from lending, so they are reducing loan disbursements," he added.

Emranul Huq also said that the opening of letters of credit has decreased due to the dollar crisis in banks. Furthermore, the work of development projects has decreased. As a result, the growth of bank credit has slowed.

However, the managing director at another private bank, on condition of anonymity, said that clients have withdrawn a large amount of deposits due to the emergence of information about irregularities in the loans of some banks.

"As a result, some banks have experienced liquidity crises. At the same time, due to this, some are failing to maintain their cash reserve ratio (CRR) against their deposits. Those banks are more concerned with maintaining CRR than with loan disbursement," he added.

According to the central bank data, the amount of excess liquidity in banks dropped to Tk1.53 lakh crore in November compared with Tk1.69 lakh crore in October 2022.

The liquidity in excess of the statutory liquidity ratio was Tk2.03 lakh crore in June 2022 while it was Tk2.17 lakh crore in November 2021.

Besides, about Tk70,000 went to the Bangladesh Bank from banks while they bought $7.6 billion in the fiscal 2021-22.

And in the first seven months of the current fiscal year through January, the central bank sold about $9 billion and received around Tk90,000 crore in turn from banks. 

However, a central bank study has found that real private growth was far below the observed growth as high depreciation consumed private credit.

The study report released recently shows that private sector credit growth in June last year was 13.7%, in September 14%, and in October 13.9%, when the exchange rate-adjusted growth was 11.9%, 10.9%, and 10.8%.

The exchange rate- and global price-adjusted growth rates were much lower at 6.6%, 7.3%, and 8.8% during the same period.

The exchange rate of the taka against the dollar depreciated by 16.47% to Tk99 in November last year from Tk85 in the same period a year ago.

Moreover, high inflation reduced consumption, which also contributed to slow credit growth.

Soaring commodity prices have put pressure on bank deposits as people barely have any money left to park in banks after meeting the increased cost of living – some are even going for encashment of their deposits to have both ends met.

The Bangladesh Bureau of Statistics recorded the overall inflation at over 9% in August and September, the highest since 2010-11 after the food inflation crossed a double-digit mark in the period.

After that, it came down to 9.1% in September, 8.91% in October, 8.85% in November, and 8.71% in December 2022.

Deposit growth dropped to 6.68% in November, the lowest in recent times, when it was above 9% in the same period of 2021, central bank data shows.