Credit slowdown exposes investment malaise
Private sector credit growth in Bangladesh has fallen to a historic low of 4.17 per cent, reflecting a prolonged investment slowdown as businesses remain reluctant to expand and banks adopt a cautious approach to lending amid persistent economic uncertainty.
The September growth rate was less than half the inflation rate of 8.34 per cent, meaning private sector credit growth turned negative in real terms. It also remained below 5 per cent for the seventh consecutive month, highlighting the weakness in demand for fresh loans.
The slowdown has continued despite Bangladesh Bank’s efforts to make borrowing cheaper.
On 30 July, the central bank reduced its policy rate by 50 basis points to 9.50 per cent in an attempt to encourage investment and stimulate lending. However, the cut has yet to generate a significant response from businesses.
Private sector credit growth stood at 4.75 per cent in August, compared with 4.72 per cent in March, 4.75 per cent in April, 4.98 per cent in May, 4.47 per cent in June and 4.62 per cent in July.
Bankers, economists and business leaders say the prolonged decline points to weak demand for loans and a lack of confidence among entrepreneurs about the country’s economic and business outlook.
Business leaders attribute the sluggish credit growth mainly to entrepreneurs’ reluctance to expand existing operations or undertake new ventures.
Seven months after the election, there has been little sign of fresh business expansion, as investors continue to regard the prevailing environment as unfavourable.
High lending rates, worsening law and order, and complications involving VAT and taxation have added to the concerns. Many businesspeople are reportedly unwilling to make new investments over the next year.
The situation has been further complicated by renewed increases in energy prices and concerns over fuel shortages.
Bankers, meanwhile, say commercial lenders are becoming more cautious, particularly when evaluating applications for fresh loans.
Former World Bank Dhaka office lead economist Dr Zahid Hussain told the media that stronger private sector credit growth would depend on a broader recovery in economic activity.
“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,” he said.
New industries and factories would need to be established and foreign investment would have to rise before demand for bank credit could recover, he added.
“Moreover, businesses are not expanding because of high inflation, while the cost of purchasing goods and materials has also increased,” he said.
Imran Kader Turjo, director of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) and managing director of Southern Knitwear, said the current business climate was discouraging 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 closed 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.
Repeated increases in energy prices were putting additional pressure on industries, while complications surrounding VAT and taxation remained another major concern, he added.
Banks shift towards government securities
With demand for private sector loans remaining subdued, banks are increasingly investing in treasury bills and bonds instead of financing businesses.
Their holdings of government securities have reached record levels over the past two to three years.
Annual reports of commercial banks also indicate that income from investments in treasury bills and bonds has been increasing relative to earnings from lending.
The trend marks a departure from the traditional banking model, under 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 closed their factories after the change in political circumstances, while many of the factories that remained operational reduced production by 30-40 per cent.
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 dropped below 5 per cent, its lowest level in more than three decades, due 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 impact on the wider economy was already becoming evident, 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 increasing 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.
Stimulus seen as a possible boost
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 per cent policy rate were limiting commercial banks’ ability to offer loans at substantially lower rates.
“Commercial banks cannot lend at rates much lower than the prevailing level because they also need to remain commercially viable,” he said.
