Credit growth makes a turnaround, pointing to green shoots

Bangladesh's economic recovery from the devastating coronavirus pandemic has received a shot in the arm after both public and private sector credit growths rose sharply in July.

Government borrowing jumped 51 per cent in the first month of the fiscal year while private sector credit growth returned to the pre-pandemic level of 9.2 per cent, data from the central bank showed.

Private sector credit growth in July was the highest in six months and went past above 9 per cent for the first time in five months.

Disbursement of the government's massive stimulus packages and rebounding economic activities from the rubble of the pandemic contributed to the sharp uptick in credit growth.

Outstanding loans in the private sector stood at Tk 10,02,966 crore in July last year and it rose to Tk 10,95,201.8 crore in July this year.

Net credit to the government sector shot up by 51.35 per cent to Tk 196,694.9 crore in July, from Tk 129,962.5 crore in the same month a year ago.

The government borrowed Tk 20,546 crore in July compared to Tk 16,689 crore in the same month in 2019.

Economic activities are picking up and there are normal banking activities, said Md Abdul Halim Chowdhury, managing director of Pubali Bank.

"You would see a lot of crowd at branches," he said.

Chowdhury said it took 15 minutes to reach his office in Motijheel from his residence in the capital's Lalmatia a few weeks ago. Now, it takes 1.5 hours.

"The year-on-year growth of credit to the private sector has increased from 8.6 per cent in June to 9.2 per cent in July, suggesting a turnaround," said Zahid Hussain, a former lead economist of the World Bank in Dhaka. 

However, the stock of credit to the private sector in July declined by Tk 2,701 crore relative to June, he said.

The private sector has on balance paid back rather than having received additional liquidity from the banking system.

Their net repayment would have been higher in the absence of disbursement from the financial stimulus packages, particularly from the one for large enterprises in industry and services.

According to Hussain, disbursement from the package for the cottage, micro, small and medium enterprises has so far been very weak because of procedural complexities. Cottage and micro-enterprises appear to have been completely left out.

In contrast, the stock of credit to the central government increased by Tk 20,847 crore in July relative to June. This was primarily due to the 6.8 per cent decline in revenue collection by the National Board of Revenue in July 2020 relative to the same month the previous year.

"A more vigorous pursuit of efforts to reduce tax evasion and leakage as well as wasteful government expenditures are needed to contain the acceleration of government borrowing from the banking system," Hussain said.

The levels of increase in credit growth in July are unsurprising as lower revenue collection and disbursements against the stimulus packages meant the government required higher public borrowing during the pandemic, said Naser Ezaz Bijoy, chief executive officer of Standard Chartered Bangladesh.

However, borrowing through savings certificates dropped significantly, which means that interest expenses for the government will not increase in the same proportion of the public sector credit growth, he said.

In the monetary policy statement for 2020-21, Bangladesh Bank has projected about 45 per cent public sector growth, hence the degree of divergence is not too high. Overall, government borrowing as a percentage of GDP is still at a comfortable level.

"Current priority is to restart the economy. But the fund needs to be utilised judiciously," Bijoy said.

The private sector credit growth is still muted at 9.2 per cent and is significantly lower than the MPS target of 14.8 per cent

"Continued lower volumes of business activities especially during the April to June period held back the growth. We have seen some green shoots in July. Hopefully, it will start increasing in line with economic growth momentum."

Lending has picked up in the banking sector. There are requests for loans in the corporate and SME segments. However, momentum is slow in the retail segment, said Rahel Ahmed, managing director of Prime Bank, recently.

He said the SME business has an acquisition cost. They are spread across the country. At the same time, there is a maintenance cost to recover the loans.

"It is very difficult to lend SMEs at 9 per cent while maintaining the acquisition and maintenance cost. The policymakers should re-consider the cap on the loans going to SMEs," Ahmed said.

In the backdrop of increased spending promises by the government, backed by the expansionary policy stance of the BB in combating the Covid-19 fallout, the public and the private sector credits are projected to annually grow by 44.4 per cent and 14.8 per cent respectively by end June 2021, the central bank said in July.

Private sector credit growth stood at 8.61 per cent last fiscal year, much lower than the actual target of 14.80 per cent.

The BB has used monetary policy instruments such as cash reserve ratio, repo facility (interest rate and tenure), refinancing facility and other monetary condition easing initiatives to inject necessary liquidity in the market.

The central bank has formed a credit guarantee scheme to support cottage, micro and small enterprises that lack adequate assets.

Disbursement of agriculture and non-farm rural credit rose 54.4 per cent Tk 1,508.73 crore, from Tk 977.15 crore a year ago and it fell from Tk 4,198.43 crore in June.

However, the disbursement in the last month of the fiscal year was up 28 per cent year-on-year, BB data showed.

The government has undertaken stimulus packages amounting to Tk 103,117 crore to tackle the impacts of the pandemic.