Stoking fears of a liquidity crunch, private sector credit growth, which remained in a slump during the pandemic and amid the pressure of interest rate capping, jumped to 9.44% in October, highest in the past one year.
The spike was the result of a rising demand amid resumption of economic activities.
Credit growth had dipped below 9% in October last year and hit its lowest of 7.55% in May this year.
The demand for loans, however, steadily ticked upwards from June, after lifting of the movement restrictions imposed during the pandemic. It climbed to 8.77% in September, according to data from the Bangladesh Bank.
Though the banking sector is still awash with excess liquidity, bankers fear that they may see a liquidity crunch soon due to the fast recovery of consumer demand.
Mominul Islam, managing director of the IPDC, one of the top non-bank financial institutions, said the financial market will experience tight liquidity next year owing to rising credit demand, mostly from consumers.
Big investments are yet to come, which may result in inflationary pressure due to a supply constraint, he said.
He hoped that manufacturers will come back to production in full scale next year as import of capital machinery is rising.
Mominul said rising inflationary pressure was likely to keep the Bangladesh Bank cautious in regards to money flow in the coming days.
Moreover, rising imports had already put a pressure on dollar price, compelling banks to buy the greenback from the central bank. As a result, cash was going into the central bank's vault which may create a liquidity crunch since that amount would remain out of the money supply.
The Bangladesh Bank sold around $2 billion in four months from July to October, which means Tk17,000 crore had been lifted from the banks in the process.
Furthermore, the selling pressure of the dollar eroded foreign exchange reserves by $4 billion in four months after it had hit a record high of $48 billion in August.
Excess liquidity in the banking sector stood at Tk2.31 lakh crore in August, central bank data shows.
Businessmen who were given credit limit last year started to avail the facility in recent months after resumption of economic activities, causing a rise in credit growth, said Mirza Elias Uddin Ahmed, managing director of Jamuna Bank.
Echoing the IPDC MD, he said a rise in demand had already put pressure on lending rates and banks will see a liquidity crunch soon.
Though credit growth has been rising for several months, it is still far below the monetary ceiling of 14.8% set for the current fiscal year.
Consumer spending rises, deposits fall
Consumer confidence has rebounded strongly in recent months as reflected in money movement indicators, with people more open to spending, especially on travelling, following the vaccination roll-out.
Moreover, soaring commodity prices amid rising inflation are also forcing consumers to spend more.
The drastic fall in demand deposits with banks, which show disposable incomes had declined by Tk9,000 crore in June-September, indicate that consumer spending has made a strong return.
Demand deposits grew at above 20% in almost every month last year when people were cooped up in their homes due to movement restrictions amid rising Covid-19 cases. The pandemic also prompted consumers to hold onto more cash on hand to face any unexpected health expenditure.
The rise in demand deposits had mostly contributed to the pile up of overall deposits in the banking sector during the pandemic.
The trend of money indicators has now reversed as cash on hold has declined significantly in September. At the same time, growth of demand deposits followed a declining trend.
Cash on hold declined by around Tk4,000 crore between August to September, according to the Bangladesh Bank data, while demand deposits declined by Tk4,000 crore in September from the previous month.
Bankers say the decline in cash on hold and demand deposits indicates that people are investing money in the real sector. Small businesses, which could not operate during the pandemic owing to various restrictions, had also returned to business armed with cash.
The sliding demand deposits slowed the overall deposit growth in the banking sector.
In September, the overall deposit growth slowed down to 11.26%, which was above 13% last year.
Bangladesh recorded its highest ever single-month export earnings amounting to $4.16 billion in September.
Import expenditure registered a 47.59% growth in the July-September period, which was in the negative last year.
With the strong rebound in import and export growth, the Fitch Solutions has revised up the forecast of private consumption growth to 8.5% for FY22 from 5.5% set previously.
In its recent projection report on Bangladesh released in September, Fitch said, "Improved Covid-19 vaccination progress will help sustain the economic recovery and consumer spending accordingly."