Higher interest, sluggish business dampen fund demand

Credit flow to private sector ebbs further as higher lending rates and ongoing business uncertainty dampens demand for funds, according to bankers.

The growth in credit flow to private sector came down to 7.28 per cent in December 2024 on a year-on-year basis from 7.66 per cent a month before, according to the central bank's latest statistics, released Thursday.

It was 2.52-percentage-point lower than the Bangladesh Bank (BB) target of 9.80 per cent for the first half (H1) of the current fiscal year (FY) 2024-25.

"Higher interest rates on lending, ongoing political uncertainty and an unfavorable business environment have reduced the demand for fresh credits in recent months," a senior executive of a leading private commercial bank (PCB) told the FE while explaining the main causes for lower growth in the private-sector credits.

He also said lower demand for trade financing, particularly for imports, also pushed down the overall credit growth to the private sector.

"There is no demand for trade financing except for essential commodities," the private banker explains.

The senior banker thinks minimal activities by some conglomerates linked to the previous regime have also contributed to lower credit growth.

"Political stability along with uninterrupted supply of utilities should be ensured for improving investment climate of Bangladesh," he said while relying to a query.

Speaking to the FE correspondent, a senior executive of another PCB said banks were now adopting a conservative approach in sanctioning fresh loans to avoid new classifications in their loan portfolios.

"We're now trying to ensure adequate collateral before sanctioning any loan to avert any risk," the banker notes about the fallouts of past loan-related anomalies on the banking front.

"Most of the scheduled banks are interested to invest their excess funds in the risk-free government securities (G-Sec) mainly due to higher yields on the securities," Md. Ali Hossain Prodhania, Supernumerary Professor at Bangladesh Institute of Bank Management (BIBM), told the FE while explaining the lower private-sector-credit growth.

Mr. Prodhania, also former MD of Bangladesh Krishi Bank, said demand for credits also remained subdued because of lower business activities.

However, a senior official of the central bank predicts that the private- sector-credit growth may increase in the coming months as import has already taken an upturn ahead of the Hole Ramadan.

The opening of fresh letters of credit (LCs), generally known as import orders, increased 4.18 per cent to US$34.89 billion during the July-December period of this fiscal year (FY) 2024-25 from $33.49 billion in the same period of FY '24.

On the other hand, the actual import in terms of settlement of LCs grew 2.65 per cent to $34.33 billion during the period under review from $33.44 billion in the same period of the previous fiscal year, according to the central bank's latest data.

He also said private-sector-credit growth continued to decline in recent months due to political unrest that led to the fall of Sheikh Hasina's government on August 5, as well as severe floods in different parts of the country.

Meanwhile, outstanding loans with the private sector rose to Tk 16850.77 billion in December from Tk 16643.24 billion a month before. It was Tk 15706.71 billion in December 2023.

Echoing the BB official's view, Dr Shah Md. Ahsan Habib of the BIBM said the credit growth to the private sector may increase in the near future if investment climate is improved.

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