Private sector credit growth increases, but too slowly

Even though banks are offering loans at cheap rates amid huge excess liquidity, private sector credit growth is rebounding too slowly as investors are still sticking to survival strategies instead of going for expansions after the reopening of the economy. 

The provisional data of the Bangladesh Bank shows that credit flow growth to the private sector improved slightly - 9.48% in September this year vs 9.36% in the previous month - but the growth rate is far below the monetary target of 14.8% set by the central bank for this fiscal year. 

The loans distributed by banks to the private sector stood at around Tk11.13 trillion as of September.

The rate of private sector credit growth came down to a single digit in November last year. It plummeted further to below 9% in March this year in the wake of the outbreak of the novel coronavirus and remained under 9% for four months till June. 

In July, the credit flow started to increase as banks started to implement government-announced stimulus packages. However, the demand for credits still remained low, taking excess liquidity to a record high of Tk1.70 trillion in August. 

It will be challenging to achieve the expected credit growth this year as businesses are still struggling to survive, said a senior executive of a private bank. 

Businesses are trying to recover from the pandemic fallouts instead of going for expansion, as a result of which demand for fresh loans is low, he added. 

Amid this situation, banks are offering consumer loans – considered risky as loans and usually lent at high interests – at 8-8.5% interest rates.

Moreover, the Bangladesh Bank has recently made consumer loans less costly by cutting down provisioning requirements for banks to boost lending. 

Through a circular issued recently, the central bank cut the general provision against all unclassified consumer finances, except for house finances and loans to professionals, to 2% from 5%.

As a result of the central bank's decision, commercial banks will make less provisions compared to earlier periods, while they will grant more loans than they did before. This, in turn, will allow the banks to make more profit.

The Bangladesh Bank's latest move came after consumer loan disbursement declined by more than 90% year-on-year in the April-June quarter of this year.

According to the Bangladesh Bank data, total consumer financing in the banking industry was Tk66,491 crore in the April-June quarter of 2020, down by 2.58% from that of the previous quarter. 

Amid low demands for loans, the banking sector saw its surplus funds increased by Tk30,000 crore in a month in August from Tk1.40 trillion in July.

Against such a backdrop, banks which had been nervously indecisive to bring down the interest rate until 1 April, are now experiencing automatic corrections in all interest rates including lending, deposit, call money, inter-bank repo, and yields of government securities.

All of the above interest rates, except for the lending rate, in the money market, have come down to below 2% -- in some cases, below 1% -- now, which were above 8-9% a year ago.

The lending rate is now below 9%, down from above 10% before April. Some banks are even offering loans at below 6% interest rates to large borrowers, according to Bangladesh Bank data.