Private sector credit growth stays below 5% for six months
Bankers and economists attributed the slowdown to weak business and investment demand, sluggish domestic consumption and economic activity, and an energy crisis that has increased operating costs
Highlights:
- Private sector credit growth stayed below 5% for six straight months
- August credit growth reached 4.75%, Bangladesh Bank data showed
- Weak demand, investment and consumption are slowing borrowing activity
- High inflation and interest rates have made borrowing expensive
- Energy shortages and costs are further hurting businesses and investment
- Reviving sick industries could boost lending, investment and credit growth
Private sector credit growth has remained below 5% for six consecutive months, with growth standing at 4.75% at the end of August, according to Bangladesh Bank data.
Credit growth stood at 4.72% in March, 4.75% in April, 4.98% in May, 4.47% in June and 4.62% in July.
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Bankers and economists attributed the slowdown to weak business and investment demand, sluggish domestic consumption and economic activity, and an energy crisis that has increased operating costs.
They also said high interest rates, driven by persistent inflation, have made borrowing more expensive.
Sohail RK Hussain, managing director of Bank Asia, said private sector credit growth was unlikely to see significant improvement over the next six months to a year.
"Demand has fallen significantly. Due to low demand, capacity utilisation of factories has also declined. Since there is still ample unused capacity in the market across various sectors, large investments to create new capacity are not needed right now unless demand increases significantly. It may take another year for this type of investment to pick up," he said.
He said large corporate entities already had high levels of bank loans or leverage, while domestic consumption and overall economic activity had remained sluggish for four to five years. As a result, large-scale new private investment projects were still limited.
He added that most current capital investment was focused on repair, maintenance and retaining existing capacity rather than creating new capacity.
Fahmida Khatun, distinguished fellow at the Centre for Policy Dialogue, said high inflation was keeping the policy rate elevated, making it difficult to rapidly increase credit growth.
"Inflation must be brought down; otherwise, reducing the policy rate will not be possible, as expansionary monetary policy cannot be pursued," she said, adding that adequate supply of goods was also needed to control inflation.
She said businesses were still lacking confidence to start new ventures despite the arrival of an elected government.
Long-standing infrastructure problems had also worsened, while higher energy prices and inadequate supply had increased business costs.
Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, said major industrial groups were struggling and had reduced production, lowering their need for bank loans.
He also said irregularities during the previous government had left only slightly more than 15 banks in good condition, reducing the overall lending capacity of the banking sector.
How can bank credit growth increase?
Bankers said sick and closed industries need to be revived by expanding business and investment, reducing interest costs and attracting new investors.
Mahbubur said inflation must be brought down to encourage new investment.
Sohail said loans to businesses that remain classified as performing but whose factories are closed or struggling should be supported through new investors and various packages.
He said effective use of the Tk20,000 crore package for sick industries could reduce interest and operating costs for highly leveraged businesses and help them restart.
However, he said implementing the package would take time as companies must be assessed, their needs identified, and borrowers must also take steps to revive their businesses.
