Aggressive borrowing by government from the banking system mainly contributed to public sector credit growth
The government's borrowing from the banking system continued to rise in December last year, surpassing its fiscal target, amid huge shortfall in revenue collection.
The public sector credit growth rose to 54.28 percent in December last year, exceeding the revised monetary target of 37.7 percent set for the second half of the current fiscal year, according to the Bangladesh Bank data.
The aggressive borrowing by government from the banking system mainly contributed to the public sector credit growth.
Of the total public sector credit growth, government borrowing accounted for 59.81 percent, according to the central bank data. The government borrowing already reached 123 percent of the total fiscal target in December.
The Bangladesh Bank does not want to restrict the government's borrowing because banks are reluctant to lend to the private sector amid the single-digit interest rate move.
In this regard, the central bank recently in its revised monetary policy improved public sector credit growth ceiling to 37.7 percent for the fiscal year ending in June – up from the previous target of 24.3 percent.
The huge revenue shortfall increased the government's dependence on banks, creating a crowding out effect for the private sector. The private sector credit growth continued its downward trend reaching at 9.83 percent last December.
The banks are reluctant to lend to the private sector amid pressure of implementing single digit lending rate, causing slump in private sector credit growth, said a senior executive of a private bank.
He said that the banks now prefer to invest in government treasury bills as interest rate on this instrument went up to 9 percent amid borrowing pressure.
"The current trend of high government borrowing and low private sector credit growth will continue as the single digit implementation will come into effect from April 1," the senior executive added.
The banks have already started to release their high cost deposit and shrink lending activities as they plan to implement the single digit in line with the government's instruction.
The adoption of this new business strategy by banks to avert risky lending in private sector is causing excess liquidity to pile up.
Liquidity increased by 65 percent to Tk1 lakh crore in November last year from Tk60,000 crore in May, according to the Bangladesh Bank data. Most of this excess liquidity lies with the private banks.
Of the excess amount, a major portion remains invested in government treasury bills while just around Tk6,000 crore sits idle as cash.
When banks increasingly invest in government treasury bills, liquidity rises.