Private credit growth slows for 10th straight month
Private sector credit growth slowed for the tenth consecutive month, hitting a 23-month low in September, due to a decrease in the opening of letters of credit (LCs) for imports and a reduction in loanable funds in banks.
In September, loans to the private sector grew 9.69%, compared to 13.97% in November 2022.
According to data from the Bangladesh Bank, the last time the growth dipped below this figure was in October 2021, when it registered a growth of 9.44%.
Arfan Ali, former managing director of Bank Asia and chairperson of Zaytoon Business Solutions, told The Business Standard that the demand for loans in the private sector has decreased due to the reduction in import LCs.
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"Besides, banks are currently facing some liquidity stress, which has made them cautious about extending loans, leading to a decline in credit growth in the private sector," he added.
The seasoned banker commented that loan growth may continue to decrease in the next few months as well.
He mentioned that due to instability in the international market, businessmen are not interested in making new investments. Various factors, including the Ukraine-Russia war and the lack of macroeconomic stability in the country, contribute to their hesitation.
In conclusion, he hoped that if the country and international conditions return to a somewhat normal state, investment may increase again.
The country's LC settlements reached a 35-month low in September, while LC openings also dropped by approximately 16.1% compared to August. This aligns with the central bank's efforts to discourage imports and ease the pressure on dwindling forex reserves.
According to central bank data, LC settlements, or import payments, were $4.37 billion in September, the lowest since October 2020, when the global economy was grappling with the Covid-19 pandemic.
In September, banks opened LCs amounting to $4.69 billion, down from $5.59 billion in August.
The biggest decrease was seen in the import of consumer goods. In the July-September quarter, $1.42 billion worth of goods were imported, which is a 48% reduction compared to the same period a year ago.
In addition, $547 million worth of capital machinery was imported in the same three months, marking a 24% decrease compared to the previous year. The import of industrial raw materials amounted to $5.16 billion, reflecting a 23% year-on-year reduction.
Ahsan H Mansur, a former economist at the International Monetary Fund (IMF), noted that the growth of deposits in the banking sector has significantly decreased over the past year.
"How can banks provide loans if they don't receive sufficient deposits? The liquidity of banks has decreased due to a drop in deposits. One of the contributing factors is the central bank's prolonged capping of the loan interest rate. I have advised the government on multiple occasions to withdraw it," he told TBS.
While commenting on the reduction of loanable funds due to the central bank's contractionary monetary policy, he mentioned that aside from raising the policy rate, the central bank has implemented several measures that have decreased loans to the private sector.
"The increase in the interest rate on loans at banks is also a contributing factor. However, this small increase is insufficient to control the current inflation," he added.
The central bank's monetary policy shows that no target has been set for private sector credit growth for the July–December period of the current fiscal year. However, the central bank had projected a growth of 10.9% in private credit, but the actual growth in July–September was lower than the projection.
According to central bank data, private sector loans stood at Tk15.13 lakh crore at the end of September 2023, which was Tk13.79 lakh crore a year ago.
