Pvt credit growth reaches 10.35% in May, slightly exceeding BB target

Private sector credit growth in May 2024 saw a slight increase, reaching 10.35%, up by 0.45 basis points from the previous month.

Bankers attributed this rise to increased import activities driven by Eid-ul-Adha.

In April, private credit growth was at 9.90%, the lowest in the previous five months, as per the central bank’s weekly selected economic indicators report.

The central bank has set a target of 10% for private sector lending for the first six months of this year (January to June). However, by May, more credit than the target set by the central bank went to the private sector.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, told The Business Standard, “Private sector credit growth increased in the months preceding Eid-ul-Fitr and Eid-ul-Adha due to a rise in imports of essential goods and various other products.

“Credit growth might decrease in the coming days due to the slowdown of the country’s economy and global market, causing businesses to be cautious about new expansions. The current contractionary monetary policy has led to loan interest rates exceeding 14%, making businesses wary of taking on new loans.” 

According to the Bangladesh Bank report, Bangladesh saw its highest Letter of Credit (LC) openings in 23 months, amounting to $6.83 billion in May, amid an ongoing foreign exchange crisis. 

The previous highest LC opening was recorded in June 2022, $7.02 billion. Since then, fluctuating dollar exchange rates and the domestic currency, the taka, have generally led to a decreasing trend in LC openings.

A treasury head of a state-owned bank told The Business Standard, “Due to the central bank’s imposition of import LC margins, imports have significantly decreased over the past two years.

“Currently, monthly LC openings are over $5 billion, resulting in a consistent decline in private credit growth for the past one and a half years.” 

“During the 2021-22 fiscal year, importers brought in about $8 billion worth of goods per month, with private credit growth nearing 14%. Now, private credit growth fluctuates, occasionally increasing due to higher imports during the two Eids,” he said.

The banker also noted that businesses are now very cautious about expanding as foreign orders for garment products have dropped by nearly 30%. “Moreover, leaving the loan interest rates to the market has led to customer loan interest rates approaching 15%,” he added.

Central bank data shows that in the first nine months (July-March) of the current 2024 fiscal year, LC openings and settlements decreased by 1.87% and 12.59%, respectively, compared to the same period in the previous fiscal year. 

In the first nine months of FY 2023, LC settlements amounted to $56.44 billion, while it reached $49.34 billion in the first nine months of the current fiscal year.

In the nine months of the current financial year, Capital Machinery’s LC and settlement fell by 24.68% to $2.12 billion. Besides, the import settlement of Industrial Raw Materials decreased by 21.87% to $1.62 billion.

According to central bank data, private credit growth was 12.62% in January 2023. Since then, it consistently decreased until September, rising slightly to 10.09% in October, only to decline again in November. However, there was marginal growth in December compared to November.

In the ongoing monetary policy, the central bank has revised all money supply targets downward, including reducing the private sector credit growth target to 10% for June from the previous 11%.

A senior official from the central bank said that the interest rate-based policy for the upcoming July-December period would be announced next week. The new monetary policy will continue to target inflation by reducing money supply, he added.

“The central bank aimed to keep inflation at 7.5% by June, but this target was not met. According to IMF staff country reports, the central bank will maintain a contractionary stance in the new monetary policy and might increase the policy rate from 8.5% to 9%, the official said.

According to a Bangladesh Bureau of Statistics report, between June 2023 and May 2024, the 12-month average inflation rate stood at 9.73%, much higher than the central bank’s target of 7.5% for the outgoing fiscal year 2023-24. 

The government aims to contain the Consumer Price Index (CPI) to 6.5% for FY25.