Most banks avoiding new borrower booking

When loans become the main products of banks to grow their business, most of them adopt a go-slow strategy to disburse fresh loans while some close new client bookings to avoid risks.

“But how can we disburse fresh loans when we are not getting new deposits even after offering 7 per cent interest to clients?” asked a chief executive of a new generation private commercial bank.

Talking to The Business Post, the official said that their bank is now extending credit facilities only to its existing clients and has closed new client bookings to avoid risks and further losses.

Like this one, a large number of banks are now reluctant to disburse fresh credit. Most of them disburse only from the central bank’s refinance fund, which reflects on their credit growth indicator.

Last year, nine banks registered negative credit growth while most banks’ credit growths were very slow, as per the data from Bangladesh Bank (BB).

Bangladesh Commerce Bank Ltd’s (BCBL) credit growth was at a negative 9.49 per cent last year. At the end of 2022, the bank’s deposit was at Tk 3,609 crore and its loans were at Tk 2,122 crore.

The bank’s advance-to-deposit ratio (ADR) was at 53.57 per cent. However, the bank is far below BB’s ADR limit, which means it will be able to disburse more loans.

Conventional banks have to maintain a maximum 87 per cent ADR while Shariah-based banks’ maximum IDR (investment to deposit ratio) limit is 92 per cent, as per the BB regulations.

BCBL Deputy Managing Director (DMD) Kazi Md Rezaul Karim told The Business Post, “Our deposit growth was not well last year and we are now focusing on quality credit.

That’s why our credit growth was in the negative last year.”

The bank’s deposit growth was also at negative 6.05 per cent last year, as per BB data.

Rezaul said that BCBL disbursed some SME loans last year and emphasised their effort only for recovering the defaulted loans.

Meanwhile, the BASIC bank registered negative 6.74 per cent credit growths, Meghna Bank Ltd negative 4.40 per cent, and National Bank Ltd negative 4.72 per cent last year. Padma Bank Ltd’s negative credit growth was at 0.69 per cent and Bank Asia’s (Islamic window) was at 8.20 per cent.

Also, foreign commercial HSBC’s (Islamic window) negative credit growth was at 18.90 per cent, the National Bank of Pakistan’s was at 0.24 per cent, and Standard Chartered’s was at 1.54 per cent last year.

A senior BB official said that some new-generation and problem-hit banks faced negative credit growth last year because they did not get enough deposits.

National Bank and Padma Bank had some embargo on disbursing large amounts of loans due to irregularities, the official added.

One Bank Ltd registered 1.37 per cent credit growth last year while the lender’s deposit growth was negative 1.77 per cent, as per BB data.

The negative deposit growth was the main reason behind the slow credit growth last year, said the bank’s MD Monzur Mofiz. “Now we are disbursing credits after scrutinising in various levels.”

Jamuna Bank Ltd’s credit growth was at 1.16 per cent, Exim Bank’s was at 6.88 per cent, AB Bank’s was at 7.24 per cent, and Mercantile Bank Ltd’s credit growth was at 7.56 per cent, according to the central bank data.

However, some banks, including Janata Bank Ltd, BRAC Bank, City bank, Islami Bank and Dhaka Bank, registered satisfactory credit growth last year.

Why the reluctance to disburse fresh loans?

Industry insiders said that the ongoing stress situation in the country’s economy, the slow growth of deposits due to growing interest rates, the liquidity crunch led by the foreign exchange crisis, single-digit lending rate, skyrocketing inflation and poor recovery from the defaulted loans are responsible for this.

At the end of December last year, the banking sector’s credit growth stood at 13.82 per cent while deposit growth was at 5.44 per cent, showed BB data.

The deposit growth did not rise as small depositors are now withdrawing their money from the banks to cover their living expenses, which has spiralled out of control due to the hikes in prices of essential commodities, said Dhaka Bank MD Emranul Huq.

He also said that an increasing number of people are currently unable to save their hard-earned money because of the rising inflation, which stood at 8.57 per cent in January this year.

Emranul also said that if a bank’s deposit growth does not go up, its lending capacity also would not increase.

In the new monetary policy unveiled on January 15, the central bank removed the specific deposit floor rate that was imposed in August 2021.

At that time, BB had asked banks not to set interest rates on fixed-term deposits below the inflation rate. As a result, fund mobilisation from the depositors became more costly, according to industry insiders.

Emranul said that the ongoing liquidity shortage created by the forex crisis was another reason behind the slow credit growth.

The excess liquidity continues to fall in recent months, hitting Tk 1,46,728 crore at the end of December 2022.

Surplus funds in the banking industry had hit an all-time high of Tk 2,31,711 crore at the end of June 2021, as per BB data.

How lending capacity got affected

Most banks had also adopted the go-slow strategy to disburse loans after the central bank imposed a bar on the lending rate on April 1, 2020.

“When we are collecting deposits at more than 7 per cent interest rate and there is a cost of defaulted loans and provisioning, how can we disburse loans at 9 per cent lending rate?” said Meghna Bank MD and CEO Sohail RK Hussain.

Due to the same reason, an increasing number of banks are now unable to disburse fresh loans, he added.

A big portion of banks’ funds are stuck as provisioning against the defaulted loan, which also impacts their lending capacity, BB officials confirmed.

Banks have to keep 0.5 to 5 per cent of their operating profits as a provision against general category loans, 20 per cent against classified loans of the substandard category, 50 per cent against classified loans of the doubtful category, and 100 per cent against classified loans of bad/loss category, as per BB rules.

The amount of defaulted loans soared to Tk 1,34,396 crore at the end of September last year, according to central bank data.

The private sector credit growth has increased in the last few months. However, it’s not indicating that the banks are disbursing fresh loans.

Meanwhile, a recent BB report said that the significant depreciation of the taka against the US dollar in recent months has positively impacted private sector credit growth.