Liquidity crunch cuts pvt credit growth

The private sector credit growth rate, which had risen in recent months, went down in December due to the ongoing liquidity crisis.

In December last year, the private credit growth rate stood at 12.8 per cent, down from 13.97 per cent in November, according to provisional data from Bangladesh Bank (BB).

The rate in August last year was the highest — 14.07 per cent — in recent months. December’s growth was 0.8 per cent lower than the target.

BB in its Monetary Policy Statement (MPS) for FY2022-23, announced in July last year, had set this sector’s credit growth target at 13.60 per cent till December and 14.10 per cent till June this year.

The private sector credit growth target remained unchanged at 14.10 per cent for the second half of FY23 in the MPS announced on Sunday.

Industry insiders have blamed the liquidity crisis in the banking sector for the fall in credit growth in December.

Currently, the banking sector is facing a huge liquidity crisis due to instability in the foreign exchange market. As a result, almost all banks are taking liquidity support from the central bank through repo.

To tackle these crises, banks are also depending on the call money market. The inter-bank overnight call money rate crossed 7 per cent in recent times, which reflects the liquidity shortage lenders are facing.

The average call money rate stood at 6.73 per cent on Tuesday.

Industry people said that surplus liquidity in banks is now falling due to the pressure on the forex market, surging import costs amid the revival of business activities, and recently surfaced loan irregularities in some Shariah-based banks.

At the end of November last year, surplus liquidity in banks stood at Tk 1,53,000 crore, down from Tk 1,69,586 crore in October, showed BB data.

The excess fund in the banking sector decreased by Tk 16,586 crore in  November since that month was very vulnerable with some banks, including Islami Bank Bangladesh Limited, facing huge pressure of deposit withdrawal following loan irregularity allegations.

Economists have said that the liquidity shortage would intensify further because the banking regulator has raised the policy rate (or repo rate) by 25 basis points to 6 per cent in its MPS for the second half of FY23.

Former researcher of Bangladesh Institute of Development Studies and Agrani Bank Chairman Zaid Bakht told The Business Post that the call money rate has gone up at a time when banks are already in a liquidity crisis. “Banks will face more trouble because of the hiked repo rate.”

Mutual Trust Bank Managing Director Syed Mahbubur Rahman also said that fund collection will become more costly in the upcoming days due to the increased repo rate and the central bank’s decision to remove the specific deposit floor rate that was imposed in August 2021.