Private sector credit appetite wanes further

• Private credit growth hits four-year low
• High rates, uncertainty weigh on lending
• Businesses adopt wait-and-see approach
• Election seen crucial for investment revival

Private sector credit growth declined further in September, hitting its lowest in at least four years, according to the central bank, indicating a stagnation in new investments and job creation even as major economic indicators show improvement.

Business leaders and economists blame a combination of factors, such as high interest rates on bank loans, cautious lending by banks and uncertainty over the political situation, for the slump.

Bankers say many of their corporate clients are now taking a wait-and-see approach. They believe demand for loans may recover after the national election scheduled for February next year.

Private sector credit growth fell to 6.29 percent in September, down from 6.35 percent in August, according to the latest data by the Bangladesh Bank (BB).

In its monthly update, the General Economics Division (GED) of the Planning Commission described August's growth as "a historic low", well below the central bank's target of 7.2 percent for the current fiscal year.

GED says high interest rates, cautious lending and both political and economic uncertainty are the main reasons for the prolonged weakness.

This comes at a time when other economic indicators are showing positive trends. Exports and remittances are increasing, foreign currency reserves have improved, and inflation is easing too.

Anwar-ul Alam Chowdhury Parvez, president of the Bangladesh Chamber of Industries (BCI), said investors are losing confidence due to the prevailing political uncertainty, which is causing a continuous decline in private credit growth.

He expressed concern about the political climate and its impact on businesses.

Parvez criticised the interim government, saying its actions lack predictability and are further denting investor confidence. "The situation is unstable, and without a clear direction, why would investors risk their capital?" 

According to him, businesses are simply trying to survive as the situation is worsening.

He said a credible election is the only way forward, adding that without a democratic process, restoring economic confidence will be difficult.

Meanwhile, Monzur Hossain, a member of the GED, said the persistent fall in credit growth is alarming, as it remains well below the target.

"It indicates that investment activity is weakening," he said.

Economists point to several causes, including rising interest rates, a subdued business environment and structural weaknesses in the banking sector.

They say liquidity constraints are preventing many banks from extending loans, especially to small and medium enterprises.

M Masrur Reaz, chairman and CEO of Policy Exchange of Bangladesh, said the fall in private sector credit growth is no surprise in the current climate.

The economist said three main factors are driving the trend.

"First, overall investment is sluggish. Naturally, when investment slows, the demand for credit also falls. Second, domestic consumption has weakened due to high inflation and declining employment, which is also weighing on credit demand."

"Although imports have picked up slightly compared to the previous year, they have not fully normalised yet," Reaz said. "As a result, demand for trade credit and trade finance is low."

He said the consistent drop in credit demand suggests a wider economic slowdown. It signals a lack of new investment and stagnation in existing ventures, especially in manufacturing and services.

He said employment could take a hit, especially among small businesses that are less able to withstand economic shocks. This will eventually slow enterprise growth.

Mati ul Hasan, managing director of Mercantile Bank PLC, said major economic indicators look good. "We have exports and remittances growing.

There is no dearth of dollars in the market as we saw in the past. Foreign exchange reserves have increased. Inflation has moderated. But demand for credit from the private sector has declined."

"It appears that all are in a wait-and-see mood. It seems that all are waiting for political stability, looking at the upcoming election in February as the cut-off line."

The banker said imports of capital machinery, especially in the ready-made garments and spinning sectors, have fallen. The import growth seen in recent months has mainly been driven by commodity shipments.

With low demand for loans from businesses, banks with surplus liquidity are turning to treasury bills and bonds.

"You have noticed that interest income of banks has dropped. It is not healthy for the banking sector. Neither excess liquidity nor a crunch is good," said Hasan.