Private sector credit growth hits low

July’s credit growth marked the lowest point since October 2021, standing at 9.44%.

Various factors, including a banking liquidity crunch, declining letter of credit (LC) openings, foreign exchange market fluctuations, sluggish deposit growth, and lackluster loan recovery, collectively pushed down credit growth, as indicated by bankers.

This credit growth in July fell short by 1.08% points compared to the Bangladesh Bank’s (BB) target of 10.90 % set for the first half of the fiscal year. 

While this may appear to alleviate inflation and reduce the demand for the US dollar, which has surged by up to 30% against the taka in the past year, ultimately, a lower loan growth may not be beneficial for the economy.

In July, LC openings dropped to $4.37 billion, a significant 31.19% decline from the previous fiscal year. 

Specifically, LC openings for capital machinery imports fell by 22.17% to $179 million, and industrial raw material imports plummeted by 36.12% to $1.35 billion, indicating stagnation in the industrial sector. 

This downward trend in industrial imports may lead to a reduction in industrial production and a rise in overdue and forced loans. Forced loans occur when clients fail to make LC payments upon maturity.

The banking sector is grappling with tight liquidity, driven mainly by slower deposit growth and a consistently high exchange rate of the taka against the US dollar. 

Surplus liquidity in the banking sector decreased from Tk 2,03,435 crore to Tk 1,66,200 crore year-on-year in June, according to BB data.

Consumer demand has been impacted negatively by soaring inflation, which reached 9.69% in July, albeit slightly lower than May’s 11-year high of 9.94%. Imports of luxury goods have also declined due to government and central bank austerity measures aimed at conserving foreign currencies.

The slower credit recovery rate has further reduced the availability of loanable funds as customers adopt a wait-and-see approach regarding the national election. 

Challenges in importing raw materials and capital machinery due to the ongoing US dollar crisis have also deferred expansion projects.

Business activities are shrinking, leading to a lack of interest among businesspeople in securing fresh bank loans. 

Export orders have decreased due to global economic volatility, and the inflow of US dollars has significantly reduced, negatively affecting imports and production. Banks are becoming cautious in disbursing loans.

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