Private sector credit growth reaches 5-month low

The private sector credit growth in the country dropped to a five-month low in April due to the liquidity crisis and rising interest rate.

The Bangladesh Bank’s data showed that the growth dropped to 9.9% in April from 10.49% in March, which was 9.96% in February, 9.95% in January and 10.2% in December of 2023.

Bankers said that the severe liquidity crisis, widened further by the Bangladesh Bank’s contractionary monetary policy, was the primary reason behind the fall in credit growth.

In addition, the central bank adopted a new interest rate policy in July last year, stating that the lending rate for banks will be determined by incorporating a 3-per cent corridor with six-month moving average interest rate (Smart) of 182-day treasury bill, which raised the lending rate to nearly 13% until May.

The high lending rate may discourage businesses from borrowing from the banking sector.

On May 8, the central bank left the determination of interest rate to the market, which created a possibility for the lending rate to rise abnormally.

The central bank continued its foreign currency sales, which acted as automatic quantitative tightening measures, significantly absorbing liquidity from the system.

Over the past 34 months, the central bank has sold approximately $32 billion from its reserves to banks.

Moreover, the banking sector’s loan disbursement capacity also diminished due to high default loans, deposit withdrawals by clients and ongoing economic challenges.

Many banks are now facing a cash crisis and have sought assistance from the central bank and larger banks to meet their daily cash needs, bankers said.

The credit growth increased in March due to high imports surrounding Ramadan and Eid-ul-Fitr, one of the largest religious festivals for Muslims.

The growth had been hovering around 10% since June 2023.

Responding to this, the central bank lowered the private sector credit growth target to 10% for January-June of the 2023-24 financial year, down from the previous target of 11%.

This adjustment reflected concerns over reduced interest from private sector investors, driven by higher borrowing costs, ongoing global and domestic economic uncertainties, liquidity constraints within the banking sector and the implementation of a contractionary monetary policy.

Economic challenges such as high inflation, foreign exchange volatility, dollar shortage and an energy crisis have further dampened business activities, making businesses hesitant to seek bank loans.

The government and the Bangladesh Bank have also tightened monitoring and imposed restrictions on imports, which have curtailed business operations and reduced the demand for credit.

The exchange rate reached Tk118 from Tk93 against the US dollar within a year.