Bangladesh's private sector credit growth has remained sluggish for several years, a trend that has worsened in recent months.
In the first five months (July–November) of the 2024–25 fiscal year, private sector loan disbursement increased by a mere 1.41%, a stark contrast to the 3.46% growth recorded during the same period in the previous fiscal year.
According to Bangladesh Bank data, private sector bank loans stood at Tk16.41 lakh crore at the end of June 2024.
By November, this figure had risen marginally to Tk16.64 lakh crore, marking an increase of just Tk23,095 crore over five months.
Bank officials note that such a slowdown in credit expansion is unprecedented, with most of the current growth attributed to unpaid interest and rising lending rates rather than fresh disbursements.
The year-on-year figures further reinforce the downturn.
Between November 2023 and November 2024, private sector credit growth stood at 7.66%, falling short of the central bank’s 9.8% target for the fiscal year's first half.
Meanwhile, government borrowing from banks has surged, rising by 3.24% in July–November, compared to a 6% decline in the same period the previous year.
Between November 2023 and November 2024, government bank borrowing skyrocketed by 20.51%.
Business Leaders Warn of Economic Stagnation
Economists and banking executives have expressed grave concerns over the dwindling private sector credit flow.
The sector, they argue, is the cornerstone of economic growth and employment generation, encompassing the bulk of industrial production, marketing, and services.
“We are facing numerous challenges, including the devaluation of the taka, rising energy costs, high inflation, and prolonged supply chain disruptions. However, the government has yet to adopt any business-friendly policies,” said Bangladesh Chamber of Industries (BCI) President Anwar-Ul-Alam Chowdhury Parvez.
Despite the rationale of controlling inflation, the policy of restricting private-sector credit appears to have exacerbated economic challenges.
Surging Interest Rates Fail to Contain Inflation
To combat inflation, Bangladesh Bank introduced a contractionary monetary policy at the beginning of the 2023–24 fiscal year, progressively raising the policy interest rate (repo rate) from 5% to 10%.
This has directly translated into higher commercial lending rates, which have surged from 9% to nearly 16% since June 2023.
However, despite these measures, inflation remains unchecked.
In June 2024, average inflation stood at 9.72%, climbing to 11.66% in July and hovering above 10% in subsequent months.
By November and December, the figures settled at 11.38% and 10.89%, respectively.
Thus, while private sector credit growth has slowed to 1.41%, the anticipated deflationary impact has yet to materialise.
Banks Reap Profits from Government Debt
Banks, meanwhile, have found lucrative opportunities in government securities.
As lending to the private sector dwindles, financial institutions have shifted their focus to treasury bills and bonds, securing high returns from public borrowing.
The 2024–25 budget, initially proposed by the now-ousted Sheikh Hasina government, stands at Tk7.97 lakh crore.
Of this, Tk1.60 lakh crore was earmarked for borrowing from domestic sources, with Tk1.37 lakh crore expected to come from the banking sector.
However, given the persistent liquidity crisis, concerns remain over the banks' ability to meet this demand.
A Looming Crisis?
Despite rising inflation and economic stagnation, banks have recorded record-breaking operating profits in 2024, driven by high-yielding government securities.
Traditionally, banks relied on interest income from private sector loans, but their revenue streams have now pivoted towards government debt.
Compounding the crisis, a persistent liquidity crunch has sent treasury bill and bond rates soaring.
Bangladesh Bank data shows that the average interest rate on 91-day treasury bills surged from 2.36% in December 2021 to 11.70% in December 2023, marking a staggering 396% increase.
Similarly, the 182-day bill rate rose by 272%, from 3.19% to 11.90% over the same period.
With borrowing costs spiralling, private sector investments are stagnating.
Uncertain Future
The Bangladesh Bank is set to unveil its 2024–25 second-half monetary policy on 10 February, with further interest rate hikes reportedly under consideration.
However, with inflation stubbornly high and private sector borrowing at its lowest, the policy's effectiveness remains questionable.
As businesses grapple with rising costs, dwindling credit, and economic uncertainty, stakeholders are calling for urgent government intervention to reinvigorate private sector investment.
Without decisive action, the nation's economic trajectory risks further stagnation, leaving entrepreneurs and workers alike in an increasingly precarious position.
