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Amid the central bank's belt-tightening, private-sector credit growth continued to plummet in August, falling to its lowest level since October 2021. The decline is attributed to banks becoming more cautious and private borrowers losing credit appetite in the lead-up to the country's election next year.
Private-sector credit growth slowed to 9.75 per cent in August, down from 10.57 per cent in July and 11.56 per cent a year ago, according to the latest data of the Bangladesh Bank.
The central bank's belt-tightening measures to contain inflation, including squeezing imports with a costly US dollar, were one of the main factors behind the decline in credit growth, said sources.
Officials and bankers also said that businesses and banks were becoming more cautious about taking and giving formal credits in the election year to avoid possible poll-related instability or uncertainty.
Economists observe the decline as a "negative sign" to the economy, as it could dampen investment, growth and job generation.
The credit flow had been on an upturn since early last fiscal year (FY23), reaching 13.95 per cent in July and 14.07 per cent in August.
But the downward trend started thereafter, with figures recording 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 subsequent months, with figures of 12.14 per cent in February, 12.03 per cent in March, 11.28 per cent in April, 11.10 per cent in May, 10.57 per cent in June and 9.82 per cent in July, show the BB data.
In the latest half-yearly monetary policy statement up to December next, the private-sector credit growth is projected at 10.90 per cent by December and 11 per cent by June next year.
Seeking anonymity, a BB official pointed out various factors contributing to the credit squeeze, including the central bank's belt-tightening measures to safeguard foreign exchange reserves and control inflationary pressures amid price spirals.
The official said trade financing, which constitutes around 40 per cent of the total funds flowing into 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 data.
Talking about the monetary target of such credit, the central banker said the BB has shifted its monetary-policy stance from monetary targeting to interest-rate targeting. Under such a new regime, the central bank made a projection of such fund flow.
"There is a misperception that still persists among many regarding the target. We do not set any targets. If there is demand, the banks can give more credit to the private sector. There is no such limit," he added.
Managing Director and CEO of Mutual Trust Bank Limited (MTB) Syed Mahbubur Rahman said under the ongoing volatile macroeconomic situation locally and internationally, private-sector players are not showing that much inclination to undertake new projects or expand their businesses.
"And this is an election year, which is why they [private entrepreneurs] are maintaining the status quo. This is probably one of the major reasons," he said.
On the other hand, the veteran banker said the cut-off yield in the government securities -- Treasury Bills and Treasury Bonds -- continues to rise.
"So, banks are now more interested in investing in such investment instruments where there is no risk of NPLs [non-performing loans]," he added.
Seeking anonymity, a senior executive of a private commercial bank said offshore financing 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."
Contacted, former chairperson at the Department of Economics of Chattogram University Professor Dr Muinul Islam said the falling trend in private sector credit flow is not a good sign for the economy at all.
"It indicates that the economy is slowing down, which will affect industrial outputs and employment growth," the eminent economist added.
According to BB data, deposit growth in the banking sector increased to 10.18 per cent in August 2023 year on year.