Private sector credit continues to slide as BB battles against inflation

Formal credit to the private sector is witnessing a continued decline amid the central bank's efforts to contain inflation through money-supply contraction and import tightening due to forex dearth, according to officials and financial-market analysts.

Private-sector-credit growth dropped to 10.57 per cent in June compared to the corresponding month last year, according to the latest statistics from the Bangladesh Bank (BB).

The credit flow had been on an upturn since early in the last fiscal year (FY'23), reaching 13.95 per cent in July and 14.07 per cent in August.

However, it started declining subsequently, recording figures of 13.91 per cent, 13.91 per cent, 13.97 per cent, 12.89 per cent, and 12.62 per cent in September, October, November, December, and January, respectively.

The private-credit growth further plummeted in the following months, with figures of 12.14 per cent in February, 12.03 per cent in March, 11.28 per cent in April and 11.10 per cent in May, show BB data.

Seeking anonymity, a BB official pointed out various factors contributing to the credit-flow drop, including the central bank's belt-tightening measures to safeguard foreign exchange reserves and control inflationary pressures.

The official said trade financing, which constitutes around 40 per cent of the total funds flowing to the private sector, has been notably impacted by the BB's strict monitoring of import-related banking activities, as evident in the private sector credit growth data.

"If we see the credit flow to the private sector in June, 2023 over its previous month (May), we see a positive growth of 1.62 per cent. But year-on-year terms, it declined," the central bank official added.

Selim R. F. Hussain, managing director and chief executive officer (CEO) of BRAC Bank Limited, attributed the overall economic slowdown to higher inflation and the spillover effects of forex tightening.

Under such a macroeconomic situation, private sector players are showing reluctance to undertake new projects or expand their businesses, he said.

"And this is an election year, which may trigger some election-related instability. So, they (private entrepreneurs) might feel this is not a proper time to invest in new ventures or products," he added.

Emranul Huq, managing director and CEO of Dhaka Bank Limited, said that import volumes have significantly decreased in recent months due to the government's belt-tightening measures to safeguard foreign exchange reserves. Consequently, disbursement in trade financing has also diminished.

The central bank's US Dollar-saving policy instrument has led to the closure of loans granted under the export development fund (EDF) window. While the BB introduced loans in local currency as an alternative to the EDF, demand for these loans remains low, according to Mr Huq.

Citing examples of his bank, the bank's top executive said offshore financing has experienced a sharp decline of almost 50 per cent across banks. "And the situation is almost the same for other banks. These are probably the reasons behind the poor disbursement of credit to the private sector."

Dr Ahsan H. Mansur, executive director of the Policy Research Institute (PRI), pointed out that the primary reason for the downward trend in credit flow to the private sector is the fall in deposit growth.

"If the liquidity situation in banks is good and the private sector does not get funds, then we can mention other reasons. Falling deposit is the main reason. The demand for funds by private entrepreneurs is still in place. It is banks who feel discomfort in giving loans under this challenging period of time," the eminent economist said.

According to BB data, deposit growth in the banking sector dropped to 8.40 per cent in June 2023 year-on-year, from 8.90 per cent.

[email protected]