Tight monetary policy strains banking sector, slows deposit and credit growth: Planning Commission report
The GED report observes that the central bank's main challenge for FY26 will be the precarious balancing act of maintaining the current disinflation gains while achieving a necessary revival of private-sector credit flows.
Bangladesh's banking sector is under mounting pressure as the year-long tight monetary policy, aimed at curbing inflation and stabilising the exchange rate, continues to significantly slow both deposit and credit growth, according to the first-ever "State of the Economy" report released by the General Economics Division (GED) of the Planning Commission.
Although some indicators showed stabilisation between January and June 2025, rising non-performing loans (NPLs) and uneven liquidity distribution have kept the sector under constant strain, says the report published today (8 December).
Reduced loan appetite
Keep updated, follow The Business Standard's Google news channel
The GED report highlights a major concern in the sharp contraction of credit growth throughout FY25: domestic credit growth slipped from 11.09% to 8.03% by April 2025 while private-sector credit growth dropped even more dramatically to 7.50%, well below the previous year's 9.90%.
This contraction mirrors a reduced appetite for new loans due to high interest rates, economic uncertainty, and stricter oversight, it says.
Deposit mobilisation also slowed, with overall growth dropping to 7.73% in May 2025 from 8.63% a year earlier, the report adds.
Conversely, Bangladesh Bank data shows a sustained erosion of Net Foreign Assets (NFA), which fell from Tk3,16,728 crore in June 2023 to Tk2,75,684 crore in May 2025, underscoring external vulnerabilities.
The GED report says that in contrast, Net Domestic Assets expanded further, reaching Tk18,50,667 crore over the same period, reflecting increased reliance on domestic sources.
Liquidity divergence
Liquidity trends diverged sharply across bank categories, the report states.
It notes that private commercial banks saw their liquidity rise significantly, while Islamic banks faced renewed stress as liquidity fell from Tk46,893 crore to Tk37,324 crore, underscoring persistent balance-sheet weaknesses.
Meanwhile, high policy rates pushed money market costs upward. With the repo rate raised to 10% by October 2024, call money rates climbed to above 10%, reflecting tighter interbank liquidity, says the report.
Despite this, lending-deposit spreads remained broadly unchanged, with the banking sector spread at 5.79–5.89% and NBFI spread at 3–3.2%. Under existing caps, SME and service-sector lending rates stayed above 6%, it mentions.
Stability ratios hold, reforms urged
Despite the broader slowdown, the GED notes that core stability ratios remained steady, indicating that banks are still meeting regulatory liquidity thresholds. The advance-to-deposit ratio (ADR) hovered between 80–81%, and the liquidity coverage ratio (LCR) stood at 158% in September 2024.
The Net Stable Funding Ratio (NSFR) remained above 105%, indicating that banks are still meeting regulatory liquidity thresholds, says the report.
It highlights that agricultural lending, while fluctuating, saw strong growth, surging to Tk3,655 crore in May 2025, reflecting strong seasonal and policy-driven demand.
Government borrowing also slowed, with credit growth easing to 9.83% from 15.91%. However, elevated public borrowing continues to crowd out private investment.
According to the report, analysts argue that improving the effectiveness of monetary policy will require action in several areas:
- Enhancing policy credibility and adopting clear inflation targets
- Removing interest caps to ensure full transmission of policy rates
- Reducing NPLs and strengthening bank supervision
- Improving liquidity management frameworks
- Promoting financial inclusion and coordinating with fiscal policy
- Allowing greater exchange-rate flexibility
- Strengthening data and monitoring systems
The GED report observes that the Bangladesh Bank's main challenge for fiscal year 2025-26 will be the precarious balancing act of maintaining the current disinflation gains while achieving a necessary revival of private-sector credit flows.
