May sees below 7% pvt credit growth amid political, banking strains

Infographic: TBS

Low business confidence amid political uncertainty is slowing private sector loan growth, while rising bad loans in banks are causing a shortage of funds, making it harder for banks to lend.

According to the latest Bangladesh Bank report, private sector credit growth stood at 6.95% in May this year – well below the central bank's target of 9.8%. 

This follows a 7.50% growth in April and a 6.82% growth in February, marking the lowest growth in the past 21 years.

Since the fall of the Awami League government in August last year, ongoing political instability and law-and-order disruptions have contributed to the sustained decline in private sector credit expansion, according to bankers and businesses.

Sheikh Mohammad Maroof, managing director of Dhaka Bank, told TBS, "Private sector credit will grow only when business confidence is restored. No entrepreneur invests in an uncertain environment."

"Political uncertainty and poor law and order during the interim government are hindering private sector credit growth," he said. 

"Additionally, a banking sector liquidity crisis – with 25% of loans in default – is limiting banks' lending capacity," he added.

The central bank's latest quarterly report cautions that the banking sector continues to face structural challenges, including a sharp rise in non-performing loans (NPLs), sluggish credit disbursement, and capital shortfalls – all of which are hampering banks' ability to issue new loans.

As of March 2025, NPLs had reached a record high of Tk4.2 lakh crore, around 25% of the outstanding loans. This mounting pressure on banks is raising concerns about the stability and health of the financial system.

In the preceding months, private credit growth had been on a downward trajectory: 7.15% in January, 7.28% in December, 7.66% in November, 8.3% in October, 9.2% in September, 9.86% in August, 10.13% in July, and 9.84% in June 2024.

This slowdown was worsened by political instability and disruptions in law and order following the change in government in August 2024.

Syed Mahbubur Rahman, MD & CEO of Mutual Trust Bank, said loan growth is slow due to low private sector demand and a liquidity crunch caused by rising defaulted loans. He added that heavy government borrowing leads banks to favour safer government loans over private lending.

"To increase private credit growth, imports must rise, especially imports of capital machinery. With more capital machinery, businesses will invest in new projects, which will increase liquidity in the market and also boost banks' deposit growth," he added.

Officials from several banks' credit departments, however, expressed optimism, citing the new fiscal budget, somewhat improved law and order, and strong import-export growth as factors likely to boost private sector credit in the coming months.

According to Bangladesh Bank data, during the first 10 months of FY25, import LC openings and settlements rose by 2.98 % and 6.08%, respectively, compared to the same period of the previous fiscal year.

In July-April of FY25, import LC openings stood at $58.94 billion, and settlements at $58.82 billion.

Although imports in general have seen some growth, LC opening and settlement for capital machinery imports have decreased by 27.46% and 25.56%, respectively, over the past 10 months.

Former FBCCI president Abdul Awal Mintoo said people's savings are falling as inflation outpaces wage growth. This, along with rising NPLs, will increase liquidity stress and limit credit availability for businesses.

He added that political instability has disrupted production across many industries. Most factories are running below capacity, and with weakening consumer demand, defaults are expected to rise further.

Fahmida Khatun, executive director of the Centre for Policy Dialogue (CPD), said the spike in defaults is drying up banks' liquidity and shrinking their lending capacity.

"This makes it harder for banks to return depositor funds and restricts credit for business expansion," she told TBS. "Since credit drives investment and job creation, this could seriously hinder employment growth."

She noted that loan demand is already subdued as businesses grapple with rising costs.