Private sector credit growth, which has been slowing down since the beginning of the current fiscal year amid pressure of interest rate capping, dropped to a historic low at 8.20 percent year-on-year in March, posing huge risks for employment and economic growth.
Despite having huge amounts of excess liquidity, banks were reluctant to lend amid the pressure of implementing single digit lending rate, which came into effect from April 1, said industry insiders.
In addition, there was a lack of demand from genuine businessmen due to a slowdown in the export and import business amid the global economic crisis.
The credit growth in March 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 placed 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 fiscal year.
However, the growth rate would return to 12 percent the next year, according to the central bank assessment report.
Public sector credit growth also slowed as bank borrowing declined in March from the previous month.
The government's bank borrowing dropped to 44.60 percent in March, which was 74.55 percent in February, central bank data shows.
"This 8.20 percent growth is mostly contributed by extended credit and forced loans," said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.
He said fresh disbursement was very small.
"We have never seen credit growth at the 8-percent-level and it will dip more in the coming months."
He said this low credit growth was because of a lack of credit demand and reluctance of bankers in lending due to low return from single digit interest rates, he said.
The implementation of stimulus packages may improve credit growth slightly, he added.
Export earnings saw a steep 83 percent fall year-on-year in April when import fell by 62 percent, according to Bangladesh Bank data.
The low credit growth will hamper employment generation severely as big business groups are not expanding their businesses, said Rahman.
To reduce operational costs, private organisations have already taken measures like cutting salaries and terminating highly paid executives, according to market insiders.
In the just concluded Eid season, most private organisations, including big business groups, did not pay festival bonuses, a long time practice, to their employees.
A study by the South Asian Network on Economic Modeling (Sanem), a nonprofit research organisation, found that about 8.7 million youths will plunge into poverty in Bangladesh due to the Covid-19 pandemic.
According to the Bangladesh Bureau of Statistics (BBS), 20.5 percent of the population, or around 34 million people, are poor.
Sanem researchers revealed that with a negative income shock of 25 percent, the overall poverty rate will be 40.9 percent, meaning that another 20.4 percent of the population or 33 million people will plunge into poverty.
In a quick response to Covid-19, the Bangladesh Bank created additional money worth Tk70,794 crore to support banks in lending to virus-struck businesses.
The money was created by forming various refinance schemes and easing CRR (Cash Reserve Requirement).
The injection of new money is part of the plan to implement a stimulus package of Tk72,750 crore announced by the prime minister to mitigate the economic impacts of the coronavirus outbreak.
Usually, banks disburse loans of Tk70,000-80,000 crore every year following credit demand, but lending capacity is assumed to be less this year due to borrowers not returning money amid a shutdown of business activities.
The central bank expects about Tk30,000 crore to come from banks this year.
As a result, some Tk1 lakh crore is ready to flow to the market, said a senior executive of the Bangladesh Bank.
As of January, total excess liquidity of the banking sector stood at Tk 1 lakh crore, central bank data shows.
However, banks have not started disbursing money under the stimulus package in full scale yet.
Banks are responsible for selecting qualified clients in line with the conditions. If they cannot, the government will take back its subsidy, said Naser Ezaz Bijoy, CEO of Standard Chartered Bangladesh.
So, banks will remain conservative in lending under the stimulus package. This is why simplification of the guideline is needed. The Bangladesh Bank has already revised some rules of the guideline to simplify the process, he said.