Private sector credit growth dips further

Amid a low demand for loans due to sluggish investment, private sector credit growth dropped further in November.

In the first quarter of the current financial year (July-September), the flow of credit to the private sector increased a little, but the downward trend started again in October, according to the Bangladesh Bank.

The central bank's data show private sector credit growth was 8.61% in October. In November, it fell by 0.4 percentage points to 8.21%.

The central bank in its monetary policy for the current fiscal year has projected private sector credit growth at 14.8%. Growth in the first quarter was above 9%, but it has fallen below 9% since October.

Syed Mahbubur Rahman, managing director and chief executive officer (CEO) of Mutual Trust Bank, told The Business Standard that the uncertainty caused by Covid-19 has not withered away, which is why the demand for loans in the private sector is less.

Entrepreneurs are reluctant to make fresh investment due to the persisting uncertainty all over the world and declining domestic demand due to the second wave of Covid-19 infections, he explained.

The main reason for the increase in credit growth during the July-September period was the implementation of the government's incentive package, he pointed out, adding that the implementation of the package is now in its final stages. "Therefore, private sector credit growth is also declining."

He said no one has made new investments with the incentive money given to the industrial sector. "This money has been spent on paying staff salaries and utility bills."

Mahbubur Rahman predicted that the rate of credit flow in the private sector will remain low for some more time.

A review of several investment indicators also shows that there is no sign of an increase in private sector investment.

For instance, during July to October this year, the rate of opening letters of credit (LCs) for the import of capital machineries decreased by about 8% as compared to the same period of the previous year. At the same time, debt settlement was over 41% lower year-on-year.

The rate of opening LCs for the import of intermediate goods and raw materials of industries and the rate of settlement LCs also have come down considerably when compared to the same period of last year.

Loan disbursement in the industrial sector alone fell by about 13% year-on-year during the July-September period this year. Meanwhile, term loans taken out by entrepreneurs for setting up new factories and expanding existing factories marked a 29.50% decrease in the first quarter of this fiscal compared to the previous year.

In this context, Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue (CPD), told The Business Standard data on imports show that businessmen are not interested in increasing production alongside investing.

He said the private investment situation was sluggish even before the outbreak of the novel coronavirus but the pandemic has made it even slower.

He also warned that the situation would not improve much in the coming months, adding that emphasis should be laid on improving the investment environment to boost investment in the private sector. He suggested making necessary reforms to improve the investment environment.

He noted that there are still many limitations in the government's initiatives to launch one-stop service for businesses, and the cost of starting a business is still high.

He asked for enhancing the efficiency of government institutions, increasing logistic support, reducing corruption and eliminating bureaucratic complications to help increase investment.