Two years ago, the Bashundhara Group had planned on going for a mega investment of Tk10,000 crore aimed at setting up an oil refinery plant. Some 24 banks primarily agreed to arrange a financing of Tk6,400 crore through syndication, but a sudden liquidity crisis in the beginning of 2018 forced the lenders to hold back.
Since then, banks have not gone for such mega investment in any private project, thus causing a sharp fall in private sector credit growth.
Credit growth dipped to 10 percent in October, which is certainly the lowest rate in recent history.
Data available for the 11 years since 2008 from Bangladesh Bank show that private sector credit growth went down to 10.8 percent in June 2013, which was the lowest till this October.
The oil refinery project of the Bashundhara Group, which would have created 700 jobs, was later dropped owing predictably to a shortage of finance.
Expressing concerns over the declining trend in private sector credit growth, Bangladesh Bank Governor Fazle Kabir recently said growth is also well short of the monetary target, a factor which can impede the pace of economic growth.
Businessmen have also expressed their worries about the continuous slide in private sector credit growth.
Rubana Huq, managing director of Mohammadi Group, put it in perspective. "We are facing difficulties in expanding business due to shortage of financing," she said.
Banks have not been implementing a 9 percent lending rate despite the government's instructions in this regard, pointed out Rubana Huq, who is also the president of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA).
"Moreover, we are losing our export competitiveness due to a strong Taka against the greenback," she noted.
Though new loan disbursement has remained stagnant, non-performing loans have been rising at a fast rate, reaching 12 percent in September, emasculating all efforts by the government to put a brake on the trend.
Against a disturbing background of rising default loans, banks prefer to invest money in government treasury bills instead of lending to the private sector, thus pulling down private sector credit growth further down.
Banks' investment emphasis on government treasury bills led to a peak in public sector credit growth to 49.71 percent, almost double the monetary target of 25.20 percent set for December by Bangladesh Bank in its monetary policy.
The central bank in its monetary programme for the current fiscal year had set private sector credit growth target at 13.20 percent for December.
According to Md Arfan Ali, managing director of Bank Asia, banks are now reluctant to invest in large projects in the private sector.
He observed that banks have been shying away from lending in the private sector against the backdrop of rising default loans.
"Borrowers are willfully defaulting on loans, with the intention of availing the special loan rescheduling facility at 2 percent down payment," said a senior executive of a private bank.
As banks have not been able to recover their loans, they have gone for a slowing down in their lending activities, he said.
"Moreover, government instructions on bringing down the lending rate to 9 percent have also rendered the banks reluctant to disburse loans," he added.
He said the government has been borrowing at 8 to 9 percent rate from banks, reducing its dependence on savings certificates. As a result, banks have felt that it is safe to invest in government bills instead of lending to private sector borrowers.
Mir Nasir Hossain, former president of the Federation of Bangladesh Chambers of Commerce and Industries, however observed that the slump in private sector credit growth is a result of a lack of demand for loans from major investment sectors.
"Sectors like spinning, cement and ceramics have already reached a near optimum level of growth and so investors are not much interested in going for big investments for their expansion," he said, adding, "The banks also cannot finance large investments due to a liquidity crunch."
Mir Nasir also opined that in order to find a way out of the present situation, the government will have to come up with monetary and fiscal incentives for investors, which in turn could help create new avenues of investment.
Meanwhile, government borrowing rose to 54.34 percent in October, according to the central bank's data. Moreover, sales of savings certificates fell by 69 percent in the first four months of the current fiscal year compared to the same period in the last fiscal year.
A lower use of national savings certificates to meet the budget deficit is positive, but it will crowd out private sector borrowing, a recent report by the global rating agency Fitch pointed out recently.