Private sector credit growth stays below 5% for seventh consecutive month

Private sector credit growth stood at 4.75% in August, following 4.72% in March, 4.75% in April, 4.98% in May, 4.47% in June, and 4.62% in July.

Bankers, economists and business leaders say credit growth is an important indicator of economic activity, and the prolonged slowdown suggests weak demand for new loans.

Business leaders attribute the slowdown largely to entrepreneurs’ reluctance to expand existing operations or invest in new ventures. Seven months after the election, there has been little indication of fresh business expansion, with entrepreneurs saying the prevailing economic and business environment remains unfavourable for investment.

High lending rates, deteriorating law and order, and growing complications surrounding VAT and taxation are among the major obstacles, they say. Many businesspeople have no plans to undertake new investments over the next year.

The situation has been made more difficult by renewed increases in energy prices and concerns over fuel shortages. Bankers, meanwhile, say commercial banks are taking a cautious approach to lending, particularly when assessing applications for new loans.

Speaking to TBS, former lead economist at World Bank Dhaka office Dr Zahid Hussain said: “Private sector credit growth will increase when the economy starts gaining momentum. Nothing has happened over the past seven months that could lead to an increase in bank lending.”

New industries and factories needed to be established and foreign investment had to increase before demand for bank credit could pick up, he said.

“Moreover, businesses are not expanding because of high inflation, while the cost of purchasing goods and materials has also increased,” he added.

Imran Kader Turjo, director of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) and managing director of Southern Knitwear, said the current business environment was not conducive to investment.

“High bank lending rates and deteriorating law and order mean businesspeople do not feel safe operating their businesses,” he said.

More than 400 factories had shut down since January, he said, adding that businesses had also been given indications that the country’s power supply situation would not improve before 2030.

“This will discourage businesses from investing in new ventures,” he said.

Renewed increases in energy prices were adding to the difficulties faced by businesses, while complications involving VAT and taxes remained another major concern, he added.

Banks turn to government securities

With demand for private sector credit remaining weak, banks are increasingly turning to treasury bills and bonds rather than lending to businesses. Their investments in government securities have reached record levels over the past two to three years.

Annual reports of commercial banks also show that income from investments in treasury bills and bonds has been rising relative to earnings from lending.

This marks a shift from the traditional banking model, in which interest income from loans was the principal source of revenue.

Private sector credit growth has been declining since August 2024, following the political transition. Several large industrial groups shut down their factories after the change in political circumstances, while factories that remained operational cut production by as much as 30-40%.

Energy shortages, high costs weigh on industries

Md Touhidul Alam Khan, managing director and chief executive officer of NRBC Bank PLC, said credit growth had fallen below 5%, its lowest level in more than three decades, owing to a combination of structural constraints and weak demand.

“Persistent gas and power shortages are preventing industries from operating at full capacity. Weak domestic and export demand has dampened the appetite for new investment, while low capacity utilisation in large manufacturing industries has reduced borrowing needs. 

“At the same time, banks are adopting a cautious approach amid high lending rates and large volumes of non-performing loans,” he said.

The economic consequences were already becoming visible, with stalled expansion and limited working capital slowing job creation and pushing unemployment higher, he added.

“Exporters facing limited trade destinations and uncertainty over utility supplies are losing competitiveness and foreign exchange earnings,” he said.

Touhidul said reviving credit growth would require coordinated measures, including raising capacity utilisation in large manufacturing industries to generate genuine demand for loans, reviewing interest rates in line with easing inflation to make viable projects bankable again, and ensuring uninterrupted utility supplies and reliable infrastructure.

“With these fundamentals in place, banks can stand ready to channel quality credit to productive sectors and help return the private credit cycle to a sustainable growth path,” he said.

Recovery through stimulus

Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue (CPD), said Bangladesh Bank’s Tk60,000 crore stimulus package could help revive private sector credit growth if implemented through its 15 financing schemes.

However, he said persistently high inflation and the 9.50% policy rate limited the scope for commercial banks to offer loans at substantially lower interest rates.

“Commercial banks cannot lend at rates much lower than the prevailing level because they also need to remain commercially viable,” he said.