The stimulus packages announced in April appear to have had no impact on the market as private sector credit growth continued its sluggish trend in June due to banks' reluctance to lend during the pandemic.
Private sector credit growth declined to 8.61 percent in June from 8.86 percent in May, according to the Bangladesh Bank's data.
The credit growth was far below the monetary target of 14.8 percent set for the last fiscal year.
Amid this gloomy situation, the Bangladesh Bank is going to unveil its new monetary policy for the current fiscal year by this month.
In its new policy, the central bank is planning to increase its credit growth target slightly from the previous target, hoping that credit demand will increase sharply soon after the situation normalises.
"Although credit growth remained downward, we will not cut down the monetary target for the new fiscal year from the previous ceiling of 14.8 percent," said a senior executive of the Bangladesh Bank.
In a recent assessment report placed with the International Monetary Fund (IMF), the Bangladesh Bank projected private sector credit growth will bounce back to 12 percent in the next year.
However, in the financial stability report for 2019, the central bank saw a risk of credit for the private sector being crowded out by high bank borrowing and banks' preference to invest in risk-free government securities.
Though default loans of the banking sector declined substantially during the latter part of last year, thanks to massive loan restructuring, proper monitoring of rescheduled loans amid the Covid-19 pandemic will be a critical challenge for the industry, the assessment report said.
The central bank worried that most of the banking sector indicators might be affected by the Covid-19 pandemic.
However, the report said the bulk amount of the government's stimulus credit packages augmented by the central bank's refinancing schemes should help the banking sector combat the pandemic.
The government has announced stimulus packages of Tk72,750 crore to support affected businesses, of which Tk50,000 crore will be disbursed through banking sources.
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 the cash reserve requirement.
However, banks seem reluctant to disburse loans due to implementation of the lending rate cap from April and fear of high default loan risks during pandemic, said industry insiders.
"Private sector credit growth will continue to slide in the coming months as banks are reluctant to lend in the retail and small and medium enterprises (SMEs) due to the lending rate cap," said Mashrur Arefin, managing director of City Bank Limited.