December sees uptick in pvt sector credit
Bankers said the central bank is implementing a contractionary monitoring policy in the current financial year to manage inflation
Highlights:
- Private credit sees a slight improvement reaching 10.2% in Dec
- Overall first-half growth remains at 9.90%, below central bank's 11% target
- Bankers attribute slow growth to central bank's inflation-controlling policy
- On 17 Jan, central bank again increased repo rate by 25 basis points to 8%
Bangladesh's private sector credit experienced a marginal increase in December 2023, reaching 10.2% compared to November's 9.90%. Nonetheless, this growth represents a six-month peak, according to the central bank.
The growth stood at 12.62% in January last year, witnessing a steady decline until September. Although there was a slight uptick to 10.09% in October, it experienced another downturn in November.
The overall growth in private sector credit stands at 9.90% for the first half of the fiscal year, against the central bank's target of 11%.
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Bankers said the central bank is implementing a contractionary monitoring policy in the current financial year to manage inflation. Consequently, the policy rate has been raised multiple times to elevate interest rates on consumer loans, thereby impacting the growth of private credit.
They said while credit grew slightly in December, it falls considerably short of the current demand for credit in the private sector. Private sector credit growth should ideally range between 15% to 18% in proportion to our GDP size.
The new monetary policy announced on 17 January for the second half of the current fiscal year, the central bank increased the key policy rate, also known as the repo rate, by 25 basis points to 8%, effectively making money more expensive for banks.
The central bank has revised downward all money supply targets. Notably, the private sector credit growth target has been reduced to 10% for June, down from the previous 11%. Also, the broad money supply has been trimmed to 9.7% from the earlier target of 10%.
"We do not have any headache about growth, inflation is our main target," said Bangladesh Bank Governor Abdur Rouf Talukder while unveiling the new policy.
Acknowledging the liquidity crisis in banks and recognising that additional tightening might adversely impact investment, he mentioned that a 1% decline in growth would not pose a significant problem. Hence, contractionary monetary policy will continue until inflation comes down to a 6% level.
Meanwhile, the Bangladesh Bank will provide various low-cost credit schemes to support employment. Loans for small businesses will be given at 4% to 5% rates under credit schemes when the market rate is above 12%, the governor said.
This tightening of monetary policy occurs at a time when private sector credit growth remains sluggish, hovering around the single-digit mark, posing challenges to the attainment of the government's growth target of 6.5%.
The Bangladesh Bank is determined to persist with its stringent monetary policy until the point-to-point inflation recedes to the 6% level, with less emphasis placed on fostering economic growth.
Why credit growth slowed down
An official of the central bank told TBS that private businesses now import fewer capital goods and machinery. Most of the loans now going to the private sector are to meet consumer goods' import costs.
He said that the interest rate of consumer loans is increasing every month as the central bank raised its policy rate several times in the current financial year.
As banks are taking liquidity from the central bank at higher rates, they increase the interest rate at the customer level, leading to a decrease in the amount of loans taken by the customers.
The openings and settlements of letters of credit (LCs) 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.
Syed Mahbubur Rahman, managing director of Mutual Trust Bank, told The Business Standard, "Private loans are decreasing due to decrease in import of industrial capital machinery and raw materials. Apart from this, foreign private debt is decreasing."
As non-performing loans are increasing in banks, they are becoming more cautious in disbursing loans which has affected growth, he added.
A managing director from another state-owned bank, who preferred not to be named, told TBS that businessmen have been cautious in taking loans due to uncertainty preceding the elections. With the elections concluded it is anticipated that the demand for business loans will see a subsequent rise.
