Slight dip in private credit growth amid tight liquidity

The private sector credit growth fell slightly in September compared to August as banks adopt a go-slow strategy for disbursing loans amid tight liquidity triggered by volatility in the forex market, and slow import financing.

In September, private sector credit growth stood at 13.93 per cent, down from 14.07 per cent in August, show latest data from the Bangladesh Bank. However, the September figure still surpassed the target for December.

The central bank in its monetary policy statement for FY23 had set private sector credit growth target at 13.60 per cent till December and 14.10 per cent till next June of this fiscal year.

Mati Ul Hasan, additional managing director of Mercantile Bank, said, “Most of the banks are now under pressure due to the liquidity crunch created by the USD shortage. Volatility in the foreign exchange market is one of the reasons behind the tight liquidity in the banking sector.”

The surplus liquidity stood at Tk 1,74,000 crore in August, down from Tk 1,89,000 crore in July, according to the Bangladesh Bank . A lion’s share of the surplus liquidity has been invested in the government treasury bonds.

The surplus liquidity in the banking sector is falling due to the USD selling spree of the central bank. The regulator sold around $5 billion to banks and withdrew the equivalent amount of Taka from the banking sector.

Mati Ul Hasan said import financing by banks has slowed down, as import payments have decreased due to austerity measures taken by the central bank.

During July to September of this fiscal year, the letter of credit settlement growth stood at 31.56 per cent, which was at 46.15 per cent during the same period last FY.

A senior official, working at a reputed private commercial bank, said the low interest rate spread was another reason behind the slow private sector credit growth.

In August, the interest rate spread stood at around 3.04 per cent, down from 3.05 per cent a month ago, according to the Bangladesh Bank. The interest rate spread has fallen due to the growing deposit rate amid skyrocketing inflation.

Bangladesh’s overall inflation was 7.56 per cent in June, 7.48 per cent in July, 9.5 per cent in August, and 9.1 per cent in September this year. The overall inflation rates recorded in August and September are both eleven-year high figures.

Most of the banks raised their deposit rates on the basis of inflation rate. The central bank in August had earlier asked banks not to set interest rates on fixed-term deposits below the inflation rate.

Commenting on the issue, Dhaka Bank Managing Director Emranul Huq said the growth in September was not so bad, and the credit growth has gone up in recent months compared to the pandemic period.