Private credit growth slows despite rising deposits

Private sector credit growth remained sluggish in November despite rising deposit growth as banks shied away from lending amid business uncertainty ahead of the general election.

Moreover, a liquidity crisis caused by dollar purchases from the Bangladesh Bank prompted banks to build up their liquidity with deposits instead of going for risky lending, said industry insiders.

Private sector credit growth declined slightly to 9.9% in November from 10% in October, according to Bangladesh Bank data.

On the other hand, deposits increased to 10.32% in November, the highest in a year, thanks to the rise in interest rate after the withdrawal of the single-digit lending rate cap in July.

Bankers say the net growth in credit to the private sector was less than 10% over the last year. If the country's economic activity had been normal, this debt growth would have been more than 15%, they say.

Why lower trend in private sector credit growth  

A senior official of the central bank said due to pre-election political unrest and an economic slowdown, private businesses have now scaled back the import of capital machinery and raw materials. Most loans to the private sector are currently directed towards covering the import costs of consumer goods, leading to a decrease in private sector debt.

He said since the central bank has raised the policy rate (one of the central bank's tools for lending to banks) multiple times in the current financial year, the interest rate on customer loans is increasing every month. As banks borrow liquidity at higher rates from the central bank, they, in turn, elevate interest rates at the customer level, consequently reducing the amount of loans taken by customers.

The lending rate on consumer loans will be 12% this month, up from 10% in June last year.

On 15 January, the central bank will announce the monetary policy for the second half of FY24. Bankers said they will continue to use contractionary measures to slow the growth of the money supply to control surging inflation.

The central bank wants December inflation to drop to 8% from 9.49% recorded in November.

Private credit growth fell for 10 consecutive months from November 2022 to September 2023, the central bank's data showed. However, it increased by 0.40 basis points in October compared to the previous month.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, told The Business Standard, "Private loans are decreasing due to a decline in the import of capital machinery and industrial raw materials. Apart from this, foreign private debt is decreasing."

LC openings and settlements in the first five months of the current fiscal year decreased by 14.06% and 27.32%, respectively, compared to the same period a year ago.

Bank deposits on the rise

According to a central bank report, the year-on-year growth rate of deposits in January last year was 6.14%, which increased to 8.40% in June. By October, deposit growth had reached 9.79%. In November 2023, deposits gradually rose to 10.32%.

The central bank lifted the spread rate of loans and deposits in July last year. As a result, banks have gradually increased the interest rate on deposits. And some banks, grappling with a liquidity crunch, offer rates as high as 10%.

Many banks have been raising more liquidity from the interbank call money market to maintain their Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). Apart from this, as the lending rate has increased, customers are also demanding higher deposit rates. So banks are collecting deposits by offering higher rates.

Bangladesh Bank data show banks borrowed Tk1,940 crore from the call money market on 28 December. This demand pushed the weighted average rate to a staggering 9.19%, marking the highest since 2013. For context, the entire year 2012 saw an average call money rate of 12.82%.