Credit flow shrinking for low demand

Hasibul Aman

14 February, 2020 12:00 AM printer

Credit flow in the banking sector is on the decline even though it was supposed to increase day by day to cope with country economic expansion.

Sliding demand for loans in the private sector coupled with rising non-performing loans (NPL) and liquidity crunch in banks are mainly blamed for the plummeting credit flow.

The country’s economy has been moving at a faster pace in recent years, which is supposed to increase economic activities in the country, according to economic analysts.

The increased economic activities, in turn, is believed to create a higher demand for credit in the market especially in the private sector, they said.

In contrast, credit flow in the banking sector is going down frustratingly, suggest central bank data.

Domestic credit flow increased by 21.08 per cent during the caretaker government in the 2007-08 fiscal year, which rose to its peak to 27.41 per cent during the first term of Awami League government in 2010-11 fiscal year. 

Subsequently, the pace of credit growth started slowing down. In 2018-19 fiscal year the credit growth dipped to 12.26 per cent. In the period, credit growth fell to half.

In the first year of the incumbent government, the growth was 16.03 per cent which increased further to 18 per cent next year and reached the highest level at 27.41 per cent in the following year.

In the 2011-12 fiscal year, credit growth slightly fell to 19 per cent and slumped to nearly 11 per cent in the 2012-13 fiscal year and fell below 10 per cent in the 2014-15 fiscal year.

During the said period, capital market debacle, global economic melt-down and political unrest forced the credit flow growth to hit the bottom, according to analysts.

Loan rescheduling facility provided in 2014 on political consideration paid off in reversing the downtrend somewhat. In the 2015-16 fiscal year, it stood at 14.25 per cent and nearly 15 per cent in 2017-18FY.

Banking sector people said credit demand for procuring real estate slumped from 2010 after the share market debacles.

 Global economic crisis and political unrest in 2013 and 2014 also squeezed loan demand in the private sector, which has continued still today.

During the first half of the ongoing 2019-20 fiscal year, overall credit growth stood at 6.14 per cent. Even though this figure was slightly higher than that of the first half of FY19, it was not enough to stir economic activities.

Meanwhile, private sector credit growth dropped to a record low of 9.87 per cent in November of the current fiscal year.

Businesses, bankers and economists said that the private sector growth was obstructed mainly by the government’s high borrowing from banks and poor business environment in the country.

Stagnancy in tax collection, stiff fall in sales of national savings certificates, and fall in export and import were also blamed.

The private sector credit growth in November was far below than the Bangladesh Bank’s projection of 14.8 per cent growth in FY20.

“The growth rate might fall further as banks were becoming weak gradually in the context of low deposit growth and high government borrowing,” Policy Research Institute (PRI) executive director Ahsan H Mansur warned. 

Banks’ capacity to lend private sector would fall further if the government implement the 6 per cent deposit rate as the policy would result in deposit growth fall, he said.

Although deposit in the banks increased a bit as people kept fund with banks instead of NSCs, the government took a higher amount of funds from the banks than the amount diverted, according to analysts.

The slowdown in private sector credit growth was a consequence of the government’s faulty policy, they added.

The government will have to improve budget management and revenue collection capacity and to reduce bank borrowing to develop the economy, they also suggested.

Net government borrowing from banks reached Tk 47,139 crore in the first five months (July-November) of the current fiscal year against its projection of borrowing Tk 47,364 crore from the banking sector for the whole year.