Private sector credit jump signals resumption of business activities

Private sector credit growth saw a big jump in July, reflecting a sign of gradual resumption of business activities following the reopening of factories in May.

In July, the year-on-year credit growth climbed to 9.20 percent from 8.61 percent in the previous month, according to Bangladesh Bank data.

The implementation of stimulus packages contributed to the credit growth, which had been hovering below 9 percent for the previous four months.

The credit growth came down to a single digit in November 2019 amid pressure of bringing down the lending rate to 9 percent.

In this situation, the novel coronavirus outbreak worsened the credit disbursement, dragging the growth down to an 8 percent level.

In the latest monetary policy declared for the current fiscal year, the Bangladesh Bank showed optimism of rebounding credit growth backed by stimulus packages.

On the back of that, the central bank has set the credit growth target at 14.8 percent for the current fiscal year against last year's achievement of 8.6 percent.

Bank executives say the credit demand may increase sharply as soon as the situation gets back to normal.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, told The Business Standard, "The single-digit interest rate was set from April 1 to inspire industrialists to increase their investment. So, there was a common prediction that the private sector credit growth would go up. But for the Covid-19 pandemic, in the April-June period, we saw a decreasing trend in credit growth.

"Now the situation is becoming normal, or it can be a 'new normal', and industrialists are coming forward to borrow money under stimulus packages. The central bank has even set a deadline to disburse the loan quickly," he added.

The central bank had set August 31 as the deadline for the implementation of the two major stimulus packages amounting to Tk50,000 crore, but later, the deadline was extended by two months to October this year.

In a recent assessment report placed with the International Monetary Fund, the Bangladesh Bank projected that private sector credit growth will bounce back to 12 percent next year.

Kaniz Almas Khan, managing director of Persona, who borrowed under the stimulus package for small and medium enterprises, said, "The loan is one kind of incentive, but the conditions to avail it are very difficult."

"I could manage to get the loan, however. But most of the SMEs are going through hardship. Now they need loans for sustaining, instead of expanding their business. So, the loan should be easily available. But the reality is that there are so many formalities to apply for the loan."

Default loans of the banking sector increased slightly during the second quarter of this year amid a waiver on classification of loans for the pandemic.

At the end of June this year, default loans soared by Tk3,606 crore to Tk96,116 crore and the percentage of the classified loans against the total outstanding amount stood at 9.16 percent.

Ahsan H Mansur, executive director of the Policy Research Institute, said the increase in private sector credit growth in July was paltry and it could not be termed a turnaround.

"To support the economic recovery, the growth must be higher," he added.

On the other hand, government bank borrowing increased by 51.35 percent in July, compared to that in the same month last year.