Private sector credit growth has fallen to its lowest level, further declining to 7.15 percent in January 2024, a decrease from 7.28 percent in December 2023. This marks the lowest growth rate recorded in recent years, even lower than the 7.55 percent recorded in May 2021, which was the last time credit growth fell below 8 percent. The significant drop reflects a broader slowdown in the economy, compounded by rising costs and ongoing uncertainty.
Declining Investment Demand Amid Economic Challenges: Banking sector experts attribute the slowdown in credit growth to reduced investment demand, driven by high interest rates, ongoing political instability, and an unstable business environment. Despite some easing of the dollar crisis, challenges such as the high cost of doing business, along with persistent issues in the energy sector, including the electricity and gas crises, have continued to dampen investor confidence.
Banks in Bangladesh are facing a severe challenge as deposit growth has slowed to below 7.5 percent, significantly limiting the funds available for lending to the private sector. This decline in deposit growth has left financial institutions with fewer investable resources, exacerbating the already sluggish credit growth in the country.
Deposit Shortfall Puts Pressure on Bank Liquidity:
The reduction in deposit growth has put immense pressure on banks’ liquidity, making it more difficult for them to provide loans to businesses and consumers. With fewer deposits, banks are struggling to meet the demand for credit, which in turn impacts private sector investment and economic activity. This issue comes at a time when the private sector is already grappling with high interest rates, inflation, and political instability, further dampening business confidence.
Bankers Highlight Rising Costs as Key Obstacle: Banking sector stakeholders have pointed out that the high cost of doing business, driven by rising interest rates and economic instability, has led to a reduced appetite for borrowing. As a result, businesses are less inclined to take on debt, contributing to the decline in demand for loans. At the same time, banks are unable to attract sufficient deposits to meet the needs of the private sector, further compounding the issue.
Challenges for Private Sector Credit Growth: Private sector credit growth has already hit its lowest level in years, with growth falling to 7.15 percent in January 2024, compared to 7.28 percent in December 2023. Experts have warned that the combination of low deposit growth and declining credit demand could have long-term consequences for the economy, limiting the ability of businesses to expand and innovate.
Strengthening Deposit Mobilization and Economic Stability: To address the liquidity crunch, experts suggest that banks need to focus on strengthening deposit mobilization efforts, particularly in attracting both individual and institutional depositors. At the same time, the government must work to stabilize the economic environment, reduce business costs, and ensure political stability to restore investor confidence. Without these measures, the current trend of low deposit growth and limited lending capacity may continue to hinder economic growth.
Low Deposit Growth Leaves Banks with Limited Funds: Deposit growth has also dropped below 7.5 percent, leaving banks with fewer funds available for lending. Stakeholders in the banking sector are concerned about the diminishing pool of investable funds, which has contributed to the sluggish credit growth. Many individuals with available capital have opted to hold onto their money due to the uncertainty in the political and economic landscape, further exacerbating the situation.
Credit Growth Data Shows Long-Term Decline: According to Bangladesh Bank data, as of January 2024, the private sector’s debt balance stood at 16,80,110 crore taka, up from 15,67,943 crore taka in the same month the previous year. However, this represents a much lower growth rate than the average loan growth in previous years. The current average interest rate on bank loans is about 12 percent, up from below 8 percent last year. This higher interest rate is further discouraging borrowing, as businesses are wary of the rising costs of financing.
Historical Context: Private Sector Credit Growth Trends: Private sector loan growth has rarely dipped below 8 percent since 2005-06. The only exception before this was in May 2021, when growth fell to 7.55 percent due to the economic impact of the COVID-19 pandemic. Prior to that, credit growth had been consistently in double digits, with the highest loan growth recorded at 25.18 percent in the 2007-08 fiscal year, driven in part by stock market speculation. After the collapse of the stock market in 2010, Bangladesh Bank imposed restrictions on private sector loans, though growth remained in double digits until late 2019. As Bangladesh continues to face economic pressures, the question remains whether the private sector will be able to recover and return to more robust credit growth in the coming months.
