Banks grow cautious in lending

A move to enforce the single-digit interest rate has prompted commercial banks into lending cautiously and tightening scrutiny of loan proposals.

The Bangladesh Bank will issue a circular to force banks to implement the lending rate for the manufacturing sector from January 1. 

Though the intention of the move is to facilitate industrialisation by reducing the cost of business, it has yielded precisely opposite results as the banks turned their lending focus to unproductive sectors from manufacturing sector. 

The banks' reluctance to lend to productive sectors is already apparent, with the April-June credit growth to the industrial sector slowing down to 10.39 percent from 46.46 percent in the same period last year. 

However, loan growth in unproductive sectors saw a jump owing to an absence of any fixed lending rates. For instance, consumer loan growth surged to 8.71 percent in the April-June quarter, which was less than 1 percent in the same period last year. The figures come from data provided by the central bank. 

Bankers see the slow credit growth in a positive light, saying that it reflects the quality of lending. 

Private sector credit climbed to an abnormally high of 19 percent two years back due to aggressive lending, said Md Mehmood Husain, managing director of NRB Bank.

The pressure to enforce the single digit lending rate has made banks cautious in disbursing loans, which will also ensure quality lending, he noted. 

The banks are now focusing their lending on unproductive sectors like consumer loans and trade finance, said a top executive of a private bank. 

As there is no regulatory limit on lending to the manufacturing sector, the single digit will prompt banks into cutting their industrial loan portfolios, which will ultimately hurt industrialisation, said the banker on condition of anonymity. 

Economists fear that current private sector credit growth is not enough for achieving the ambitious economic growth of above 8 percent. 

The current 10 percent private sector credit growth is not good enough for achieving the expected economic growth because it is far below the central bank's monetary target, said Ahsan H Mansur, executive director of the Policy Research Institute.

The central bank in its monetary programme has set a private sector credit growth target of 13.20 percent for December. 

Though the single digit is yet to be fully implemented, banks went for a change in their approach to lending following the government's instructions to them since April last year to bring down the lending rate below the double digit. 

The private sector has already been feeling the pinch of a single digit interest rate as credit growth has maintained a downtrend for the last two years. 

In November 2017, private sector credit growth rose to a peak of 19 percent due to aggressive lending by banks. The abnormal rise in credit growth prompted Bangladesh Bank to rein in credit growth by cutting down the advance deposit ratio last year. The central bank's firm move slowed down credit inflow to the private sector, which continued throughout last year. 

In such a situation, Finance Minister AHM Mustafa Kamal, soon after taking office in January this year, pressurised the commercial banks to implement the single digit interest rate to reduce default loans. 

The pressure for implementing the single digit prompted the banks to go slow on a disbursement of loans, causing a historic fall in private sector credit growth to 10 percent in October. 

Private sector credit growth could deteriorate further in November, coming down to the single digit. 

The slow credit growth piled up excess liquidity in the banking system. Just a year back, banks went through a crunch period, with little money to lend. But now their money in the vaults has ballooned to Tk90,000 crore.