Private Sector Credit Drops to 4.47pc in June; Bankers Expect Policy Measures to Boost Growth

Private sector credit growth dropped further to 4.47 per cent in June, down from 4.92 percent in May, remaining far below Bangladesh Bank (BB)'s revised target of 6.8 per cent.

This was revealed by the central bank on Tuesday.

The latest data suggest businesses are still reluctant to borrow for expansion amid high lending rates, gas and power shortages, weak industrial activity and cautious lending by banks burdened with rising default loans.

The slowdown comes despite banks now holding comfortable liquidity. Loan demand has remained weak as many businesses have postponed investment plans, while banks have become more selective in approving loans because of asset quality concerns.

However, bankers believe the picture could start changing in the coming months as the government's and Bangladesh Bank's recent policy measures have not yet had enough time to fully feed through into the economy.

In recent months, the BB announced a Tk 60,000 crore financing package to support industries, agriculture and cottage, micro, small and medium enterprises (CMSMEs). The package includes a Tk 20,000 crore pre-financing fund, allowing banks to use their excess liquidity to finance factories that are operating below capacity or have remained closed due to financial constraints.

The central bank has also reduced the policy rate by 50 basis points, signalling the beginning of monetary easing after maintaining a tight policy stance for more than a year to contain inflation. 

Md Abdul Mannan, Head of Credit at SBAC Bank, said the latest private credit figure mainly reflects economic conditions before the latest policy support became effective.

"Private credit is a lagging indicator. 

The recent measures, including the policy rate cut and the Tk 60,000 crore financing package, are very new. These initiatives need time to pass through the banking system before businesses start borrowing. If inflation continues to ease and energy supply improves, we expect credit demand to gradually recover in the coming months," he said.

He said banks now have enough liquidity, but lending has remained slow because businesses are avoiding new investments while banks are carefully assessing risks amid high non-performing loans.

Md Khorshed Alam, Director of the Bangladesh Textile Mills Association (BTMA), said manufacturers continue to face serious challenges despite improving macroeconomic conditions.

"High financing costs, gas shortages and weak export orders have discouraged fresh investment. Many mills are running below capacity. If energy supply becomes stable and borrowing costs come down following the recent policy easing, entrepreneurs may regain confidence and investment could increase in the coming months," he said.

Economists say the prolonged slowdown in private credit has been driven by both weak demand and tight credit supply. Businesses have delayed expansion because of economic uncertainty, while banks have tightened lending standards after a sharp rise in classified loans.

Although government borrowing from banks remained significant during the past fiscal year, the banking sector is now relatively liquid, reducing pressure on funds available for private borrowers. Banks have instead parked a large portion of their excess funds in Treasury bills, Treasury bonds and Bangladesh Bank facilities because of subdued private loan demand.

Bangladesh Bank expects the latest policy support-including the Tk 60,000 crore financing programme, the Tk 20,000 crore pre-financing fund and the 50-basis-point policy rate cut-to gradually stimulate industrial production, revive investment and create employment. 

As these measures begin to take effect, bankers expect private sector credit growth to improve gradually over the next several months rather than immediately.

Even so, analysts say a sustained recovery will ultimately depend on stronger business confidence, uninterrupted gas and electricity supplies, lower inflation and continued stability in the financial sector.