Private sector credit growth in the country has slowed slightly after six months due to a reduction of money lent by banks amid liquidity crunch and drop in the country's imports.
In September this year, the private sector credit growth dropped to 13.93% compared to the same time last year, while in August it was 14.07%, according to the data obtained from the Bangladesh Bank.
According to central bank data, private sector credit growth was 8.38% in July 2021. This was followed by six consecutive months of growth to 11.07% in January 2022. The growth slowed slightly to 10.87% in February this year, then continued to increase until August. It fell by 10 percentage points in September.
People involved in this sector said most of the banks across the world have tightened their monetary policy to control inflation by reducing the money flow. The Bangladesh Bank has also reduced the private sector credit growth in FY23 to 14.01%, but it is still very high considering the low interest rates in recent times. So, money flow should be reduced further to control inflation.
Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, told The Business Standard that banks' loans increased due to the increased import costs in the country after the Covid-19 pandemic. Currently, most banks are suffering from a liquidity crisis. The deposit rate is close to 7% as inflation has been rising in the country. On the other hand, the interest rate in the money market is very high, so the banks are not interested in borrowing money at a high interest rate and lending it for a nominal profit.
He further said imports have been significantly decreasing due to the duty slapped on many products. Besides, many people are not taking loans worrying about which direction the situation would turn in the future. As a result, the credit growth is slightly lower now.
After the Covid-19 pandemic subsided, private sector credit increased heavily as the import costs jumped due to an increase in import volume. The Russia-Ukraine war worsened the crisis.
The country's imports have been decreasing for the past few months due to the central bank's restrictions on imports. In September, the rate of LC opening fell by 31.16%, compared to the previous year.
In September, traders opened LCs involving $5.70 billion, which was $8.28 billion in the same time of the previous fiscal year. That means LC opening dropped by $2.58 billion compared to the same period of last year.
Besides, the central bank has also raised the repo rate on four occasions in recent times in an attempt to control the ongoing inflation by reducing money flow. Banks have to borrow money from the central bank at 5.75% since 2 October.
Meanwhile, the inflation rate in the country was 9.1% in August, which was 9.5% in July. As the inflation rate increased, the deposit rate of the banks increased too, but the lending rate remained the same, resulting in credit growth.
According to the central bank, the growth of deposits in banks was 7.53% in August this year, while the credit growth during this period was 14.78%. Banks have a liquidity crunch as loans grow faster than deposits.
According to Bangladesh Bank sources, commercial banks took Tk12,546 crore loan from the central bank through treasury bills and bonds in July, and Tk12,255 crore in August, Tk15,798 crore in September this year. But at the same time last year, the central bank lent around Tk2,000-3,000 crore per month to the commercial banks.
In September 2021, the dollar exchange rate was Tk85 in the country. Since then, the country started selling dollars from its reserves as its imports increased. Due to the regular sale of dollars, the country's reserves continue to decrease, and the price of the dollar on 9 January this year increased by Tk1.
The dollar crisis continued to intensify from April this year due to which its price continued rising too. Now the central bank is selling dollars at Tk97 for government imports. However, the bank-to-bank exchange rate for dollars was maximum Tk105.
Former Bangladesh Bank governor Salehuddin Ahmed told TBS, "Inflation is increasing due to the increase in the price of goods in the international market and the increase in the price of the dollar. To reduce this inflation, money supply has to be reduced. If the supply of money in people's hands increases, then inflation will increase too.
"Currently, the private credit growth in the country is very high. However, if it is spent on the manufacturing sector, it will not affect the inflation, so the banks will have to give loans to the manufacturing sector."
In August of FY22, the central bank's reserves stood at $48 billion. However, in the last fiscal year, it sold $7.6 billion to banks due to increased import volumes and higher import costs. The reserve stood at $35.85 billion on 26 October due to the sale of $4.5 billion so far in this fiscal year.