Private sector credit remains sluggish in November

Private sector credit remained sluggish with a 13.92% year-on-year growth in November 2022, reflecting slowdown in economic activities amid liquidity shortage and high inflation.

The banking sector has been going through a slowdown in credit growth since September, breaking the upward trend of the previous six months because of import restrictions imposed by the Bangladesh Bank to save foreign exchange reserves.

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.

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

Infographic: TBS

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 $1 depreciated by 16.47% to Tk99 in November last year from Tk85 in the same period a year ago.

However, banks are now spending Tk105 per dollar for import settlement.

The study notes that private sector credit growth is mainly driven by export-import financing due to high exchange rate costs.

The growth of export-import financing in terms of the local currency climbed to 19% in September last year, which was 9% in the same period previous year. But in terms of the greenback, the growth was negative 0.5% – meaning banks were spending more money for less amount of export-import.

Mohammad Ali, managing director and chief executive officer (Current Charge) of Pubali Bank, told The Business Standard that there are two perspectives of credit growth – borrowing by new entrepreneurs has increased and borrowing by industries and importers is also on the rise.

Industries such as feed mills or flower mills are importing raw materials, and their funded debt has also increased, he mentioned. Ali said loans in the garment sector are also increasing as compared to earlier, one of the reasons for this being taking loans to pay employee salaries as their payments are deferred.

Besides, a surge in inflation has also led to a rise in demand for working capital, contributing to an increase in borrowing, the Pubali Bank MD continued.

Selim RF Hussain, chairman of the Association of Bankers Bangladesh (ABB) and managing director of Brac Bank, however, said the fresh loans are not the sole reason behind the growth in private sector credit.

"Many loans are being rescheduled, and it is not correct to see them as new loans. I think rescheduled loans will be a big part of this growth. Although we know the information of individual banks, only the central bank can make clear statements about the entire sector," he said.

Taking taka depreciation in consideration, the central bank is planning to inject more money into the banking system in the upcoming monetary policy for the next six months of the current fiscal year, said a senior executive of the Bangladesh Bank.

Although inflation is high, the increase of money supply will not create further price pressure as real credit growth is low, the official said.

Moreover, the government has revised up the inflation target to 7.5% for the current fiscal year from 5.6% projected in the current budget. As a result, the central bank will get more space to increase money supply keeping inflation within the target, the official added.

Inflation cooled down to 8.71% in December after picking up to 9.5% in August last year.

The government also accepted the economic slowdown as it revised up major economic indicators in its budget, bringing balance with the new reality.

Export growth target has been cut down to 6% from the actual 20% while import growth now has a new target of negative 4%, according to a presentation at a meeting of the Economic Coordination Council on Fiscal, Currency and Exchange Rate on 20 December.

The meeting also cut the GDP growth target by 1 percentage point to 6.5% in the revised budget at the end of the current financial year.

The cut down in import-export growth hints that it will further squeeze private sector credit.

Banks remained cautious in lending amid the liquidity crunch that originated from the dollar crisis, causing slowdown in credit growth, said industry insiders.

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

Soaring commodity prices have put pressure on bank deposits as people are barely having 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.

On top of this, banks' increased spending on dollar purchases and an upsurge in credit flows to the private sector are drying up liquidity in the banking system.

Deposit growth dropped to 7.35% in October, lowest in recent times, when it was above 9% in the same period of 2021, central bank data shows.

Amid this situation, the Bangladesh Bank raised the lending rate cap on consumer loans to 12% in November last year after two and a half years of setting the interest rate ceiling at 9% for all types of loans.

At the same time, the central bank lifted the floor on deposit rates that was capped above inflation in August last year to protect depositors' interest.

Most banks raised the interest rates on their consumer loans to double-digit from 1 December, said industry insiders.

The government is also borrowing from the Bangladesh Bank instead of commercial banks to give space to the private sector amid the liquidity crisis.

The government borrowed Tk37,000 crore from the Bangladesh Bank in July-November 2022 while it paid back Tk21,000 crore to commercial banks.

The central bank provided this amount to the government through injecting fresh money into the economy, according to the central bank data.