Declining credit flow to the private sector as high interest rates and slow business activity reduce demand for funds

Private Sector Credit Flow Declines Amid High Lending Rates and Business Uncertainty

Credit flow to the private sector has continued to decline as rising lending rates and persistent business uncertainty dampen demand for funds, according to bankers.

The latest data from the central bank, released on Thursday, shows that private sector credit growth slowed to 7.28 percent in December 2024 on a year-on-year basis, down from 7.66 percent in the previous month. This figure falls 2.52 percentage points short of the Bangladesh Bank's (BB) target of 9.80 percent for the first half of the 2024-25 fiscal year.

"High interest rates, ongoing political instability, and an unfavorable business environment have significantly reduced demand for fresh credit in recent months," a senior executive of a leading private commercial bank (PCB) told The Financial Express (FE). He further noted that weak demand for trade financing, particularly for imports, has contributed to the overall slowdown in private sector credit growth.

"There is little demand for trade financing except for essential commodities," he added.

The banker also pointed out that limited activities by some business conglomerates linked to the previous regime have played a role in the sluggish credit growth.

"Ensuring political stability and an uninterrupted supply of utilities is crucial for improving Bangladesh's investment climate," he said.

Another senior executive from a PCB stated that banks are now taking a cautious approach in approving new loans to prevent further deterioration of their loan portfolios.

"We are prioritizing adequate collateral before approving loans to mitigate risks," he explained, highlighting the impact of past lending irregularities on the banking sector.

Md. Ali Hossain Prodhania, Supernumerary Professor at the Bangladesh Institute of Bank Management (BIBM) and former Managing Director of Bangladesh Krishi Bank, attributed the decline in private-sector credit growth to subdued business activities.

"Most scheduled banks are opting to invest their surplus funds in risk-free government securities (G-Sec) due to their higher yields," he told FE.

However, a senior central bank official expressed optimism, predicting that private-sector credit growth may rebound in the coming months, driven by increased import activity ahead of Ramadan.

According to central bank data, the opening of fresh letters of credit (LCs)—indicating import orders—rose by 4.18 percent to $34.89 billion during the July-December period of the 2024-25 fiscal year, up from $33.49 billion in the same period of the previous year. Meanwhile, actual imports, measured by LC settlements, grew by 2.65 percent to $34.33 billion in the same period.

The BB official also pointed to political instability—following the fall of Sheikh Hasina’s government on August 5—and severe flooding in various parts of the country as additional factors affecting credit demand.

Despite the slowdown, outstanding loans in the private sector increased to Tk 16,850.77 billion in December, up from Tk 16,643.24 billion in November. This marks a rise from Tk 15,706.71 billion in December 2023.

Echoing the central bank’s outlook, Dr. Shah Md. Ahsan Habib of BIBM suggested that private-sector credit growth could pick up if the overall investment climate improves in the near future.