Private credit growth slows further

Private sector credit growth in Bangladesh slowed further in February owing largely to a tight liquidity situation in the banking sector amid falling deposits growth, the decline in demand for imports, and the rise in the cost of funds.  

Bangladesh Bank data showed that banks' finance to the private sector grew 12.14 per cent year-on-year to Tk 14,34,069 crore in February, the third consecutive month that saw a slowdown.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said the credit growth declined as the flow of deposits from savers slowed.

"This has ultimately affected the credit flow," he said, adding that many banks could not attract deposits.

The deposit growth slowed in the third and fourth quarters of 2022 compared to the second quarter.

Overall, the growth of deposits slowed to 5 per cent at the end of December 2022, much lower than the 9.6 per cent recorded a year ago, BB data showed.

As of December, deposits totalled Tk 15,88,010 crore in the banking system.

Mansur, a former economist at the International Monetary Fund, said demand is not a problem. "The problem lies in the lack of availability of loanable funds."

He said the actual credit growth to the private sector might be lower if the increase in foreign credit owing to the sharp depreciation of the taka was taken into consideration.

According to the economist, when local firms secured foreign loans, banks calculated the exchange rate at Tk 84 per US dollar.

"Following the depreciation of the taka to Tk 105-Tk 106, the amount of foreign loans in the local currency terms has increased."

Mansur warned that the slowdown in private credit growth would cause a slowdown in economic activities.

Imports have already declined.

Bangladesh's imports dropped 5.66 per cent year-on-year to $44.031 billion in the July-January period of the current fiscal year, according to central bank data.

Mohammad Ali, managing director of Pubali Bank Ltd, attributed the slowing growth of private credit to reduced trade financing as imports are falling.

"There is also a slowdown in demand for loans to import raw materials used in producing goods for the export markets."

He said owners are holding a minimum stock of raw materials to keep their factories operational. "Importers are also doing the same."

"The interest rate has risen on loans and advances. As a result, the cost of borrowing has gone up. This has made a section of borrowers cautious."