Private credit growth hits 13-month low in April

Private sector credit growth continued to decline for the fourth consecutive month, with a growth rate of 11.28% this April – the lowest in 13 months, reflecting a slump in business activities amid import curbs.

Loan demand in private sector businesses slowed down despite having available liquidity in the banking system.

The credit growth falls well below the monetary target of 14.1% set for the current fiscal year, as reported by the Bangladesh Bank.

This slowdown in private sector business activities comes at a time when the government is planning to set a GDP growth target of 7.5% for the upcoming fiscal year. The GDP growth rate for the current fiscal year has been revised down to 6.5% in the revised budget from 7.5% set in the original budget because of the ongoing economic slowdown.

Data from the central bank reveal that the banking sector has been experiencing a decline in loan demand since December 2022 after the private sector credit growth reached 13.97% in the previous month. Last March, growth stood at 12.03%.

Demand for loans has declined amid foreign currency pressure and the global economic crisis, Selim RF Hussain, chairman of the Association of Bankers, Bangladesh (ABB), told journalists recently at a press conference, where top bankers claimed that the liquidity situation of the banking sector improved considerably.

Hussain who is also the managing director of Brac Bank, said liquidity is not a big issue now but it is all about demand. Businesses are not going for expansion owing to limitations in import and the global crisis. Banks have available liquidity in local currency to lend, he maintained.

He said that even though pressure on foreign currency eased considerably amid a fall in imports, banks are cautious in opening letters of credit (LCs).

He referred to the improved sources of foreign currency and mentioned that banks can now open LCs, although not for all transactions.

"Previously, banks would open LCs without considering the payment capacity, but now they have moved away from this practice," he said, adding that banks are now more cautious in this regard as the central bank has instructed lenders to open LCs based on their payment capacity.

LC opening reached a 32-month low of $4.30 billion in April 2023 due to a combination of restrictions imposed by the central bank and the ongoing dollar crisis.

Additionally, LC settlement reached a 21-month low of $4.69 billion in April, mainly due to a significant decline in LC openings witnessed in recent months, according to data from the Bangladesh Bank.

Many businesses are in trouble due to restrictions on imports as they could not import adequate raw materials, said Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank Limited.

On the other hand, many exporters are facing shipment delays and order cancellations from buyers as a result of the global crisis. Consequently, businesses are not going for expansion which will ultimately have an impact on employment generation and banks' profitability as well, he added.

When private sector credit growth was on a downward trend, government borrowing skyrocketed in recent months due to a fall in revenue income and high-interest payment burden amid rising dollar prices.

Bangladesh Bank data show that the government borrowed Tk29,697 crore from banks in April, the highest amount borrowed in a single month during FY23.

According to the Bangladesh Bank, from July to April in FY23, the government borrowed a total of Tk82,057 crore from the banking system, and around 80% of this fund was provided by the central bank.

Analysts predict that the government's borrowing from banks may surpass the target of Tk1,06,334 crore for fiscal this year, considering the remaining two months and the typical rise in borrowing during this period, coinciding with increased expenditure.

According to sources at the National Board of Revenue, the shortfall in revenue collection against the target is about Tk28,000 crore in the first nine months (July-March) of the current fiscal 2022-23.