Banks cut rural credit

Commercial banks' spotlight on burgeoning rural Bangladesh keeps fading with disbursement of formal credits and the number of branches in the least-developed areas constantly shrinking, leaving potential local economy in the lurch.

Officials and bankers have said because of the bank-financing crunch, condition of cottage, micro, small and medium enterprises (CMSMEs) in the rural areas is worsening by way of losing their market to imports.

Bankers have identified several factors like rising cost of fund and production in this higher-interest and- inflation regime that made a strong bite on the demand for credits in the rural areas after the covid-induced shocks.

As a result, the flow of fresh disbursement in the rural communities continues dropping in recent months. As a matter of fact, the banks, as part of their cost-cutting mechanism, keep reducing the number of rural outlets but serve their rural clients through agent banking.

According to data of Bangladesh Bank (BB), the country's central bank, banks altogether had invested Tk 14.46 trillion in various sectors across Bangladesh up to June 2023 when the share of rural areas was 12.02 per cent or Tk 1.74 trillion. The remaining Tk 12.72 trillion or 87.98 per cent was invested in urban regions.

The share of bank loans in rural territories continues declining to reach 8.05 per cent or Tk 1.24 trillion at the end of December 2023 while the share of urban areas ballooned to 91.95 per cent or Tk 14.15 trillion amid the centripetal banking paradigm shift.

Seeking anonymity, a BB official said alongside disbursement of loans, the rural deposit portfolio in banks also dropped significantly in recent months probably because of higher inflationary pressure.

Citing data, the central banker said the share of rural deposits was 21.27 per cent or Tk 3.59 trillion until June 2023 but it dropped to 15.23 per cent or Tk 2.66 trillion by the end of the previous calendar year.

Contacted over the conundrum, which is seen bad for a balanced economic growth, managing director of Shahjalal Islami Bank PLC Mosleh Uddin Ahmed said the central bank introduced refinancing schemes for the CMSMEs for assisting them in recovering from the Covid-induced shocks.

But the one-year-long funds have already been repaid and no fresh such refinance scheme has been introduced yet, he said as one reason for such situations.

The experienced banker feels the higher inflationary pressure and rising interest rates badly affect the operations of CMSMEs and the result is obvious: cost of funds and productions continues mounting.

"So, their (CMSMEs) products keep losing their competitiveness with the imported goods, which is probably another reason behind the falling demand for credits in rural region," he says.

Regarding the falling number of rural branches, Mr. Ahmed says maintaining full-scale rural branches under the current liquidity tightness has become costly and unviable for any commercial bank.

"I think financial inclusion like agent banking is the right instrument for rural development now."

Top executive of Dhaka Bank PLC Emranul Huq says the growth of CMSMEs remains stymied in recent months as the rate of fresh disbursement keeps falling.

He mentions that the rate of interest for bank credits has increased significantly since June last year amid the central bank's contractionary monetary stance to contain inflation, which naturally enhances the cost of funds and productions for the rural enterprises.

"This could be a reason behind falling demand for credits in rural areas," he adds.

President of Barishal Metropolitan Chamber of Commerce and Industry (BMCCI) Mohammad Nizam Uddin says the entrepreneurs in the region, particularly in the rural areas, have been severely suffering due to poor access to formal credits over the years.

"We keep requesting the higher bank officials about the pains, but nobody listens to us even though entrepreneurs have all the documents required for getting funds. I don't know why the bankers are so shy in giving credit," he told the FE correspondent, on a note of frustration.

"Because of reluctance of top bank management to give loans to rural areas, the entrepreneurs are getting demoralised for not receiving the bank finance which is the key to industrial and employment growth," the business leader said.

[email protected]