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MONDAY, SEPTEMBER 25, 2023
Forced loans during shutdown drive up private credit

Banking

Jebun Nesa Alo
04 June, 2020, 11:05 pm
Last modified: 05 June, 2020, 12:41 am

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Forced loans during shutdown drive up private credit

Banks’ private sector credit growth rose to 8.82% in April from a historic low of 8.20% in the previous month

Jebun Nesa Alo
04 June, 2020, 11:05 pm
Last modified: 05 June, 2020, 12:41 am

While all business activities were in a standstill in April amid a countrywide coronavirus shutdown, the banking sector saw an improvement in private sector credit growth after a six-month downward trend. 

In April, credit growth increased to 8.82 percent from a historic low of 8.20 percent in the previous month, according to Bangladesh Bank data. 

The growth was mostly accounted for by forced loans as many importers failed to make repayment due to worldwide supply disruption amid the pandemic, according to industry insiders.

There are two major reasons behind the improvement in credit growth -- one is non-payment by borrowers and the other is forced loan, observes Md Arfan Ali, managing director of Bank Asia. 

"Borrowers could not repay their loans during shutdown, resulting in an increase in the overall loan balance that ultimately contributed to credit growth. On the other hand, many importers could not make LC (letter of credit) payment during that period. As a result, banks turned the non-funded loans to funded ones creating forced loans," he explains. 

Moreover, some institutions took out working capital loans during the shutdown to pay salaries to their employees, he continues, fresh loan disbursement, however, was almost nil in that period. 

Forced loans are created when clients fail to make their LC payments on maturity dates, and yet banks have to meet up their import obligations to foreign banks.

Many importers are trying to apply force majeure provisions of the International Chamber of Commerce (ICC), the world business organisation, says Standard Chartered Bangladesh Chief Executive Officer Naser Ezaz Bijoy.

This is because importers could not make their payments amid business suspension during the shutdown, he adds. 

Force majeure is a clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties takes place.

Government borrowing also jumped to 79 percent in April from 44.60 percent in the previous month, according to Bangladesh Bank data. 

Meanwhile, government expenditures increased during the shutdown to support the health sector and businesses, Bijoy says, adding that all this financing came from the banking channel as revenue income was very low. 

In April, export and import fell drastically reflecting that businessmen were unable to make their LC payments. 

Export earnings saw a steep 83 percent fall year-on-year in April when imports fell by 62 percent, according to Bangladesh Bank data.

The total loan to the private sector stood at Tk10,75,110 crore at the end of April, central bank data show. 

Private sector credit growth started to move downward from October last year and came down to single-digit in November amid the pressure of bringing down the lending rate to a single digit. 

However, the credit growth in April was far below the monetary target of 14.8 percent set for the fiscal year 2019-20 by the Bangladesh Bank.

In a recent report submitted to the International Monetary Fund (IMF), the Bangladesh Bank expected private sector credit growth to end up at 8.5 percent by the end of the current fiscal year.

However, the growth rate would return to 12 percent next year, to the central bank assessment report hoped.

Economy / Top News

Private Sector / Credit Growth

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