• Wednesday, Apr 08, 2020
  • Last Update : 05:38 pm

Fallout of falling private credit

  • Published at 10:31 pm January 28th, 2020
Private-Credit-graph

Govt vision of growth may be at stake

Abdur Rashid, a mid-tier entrepreneur in Gazipur, was disappointed when he was granted only Tk6 crore in loans against his demand for Tk12 crore from a commercial bank in 2019.

He needed the money badly as he ran out of fund after spending on land development and erecting new building and was unable to import capital machinery.

The bank concerned cited to him drying up of liquidity, caused by unstoppable default loan, which made them unable to allocate money as sought in the application. 

This liquidity crisis in the banking sector dragged down the country’s private sector credit growth to single digit at 9.87% in November last year against a 14.8% target for the FY20. 

Continued slower growth in private credit has raised question about government target of increasing private investment to 24.20% to the gross domestic product (GDP) in the fiscal year 2019-20.

Private investment to GDP ratio is hovering at 23% and in the last fiscal year it was 23.57%.   

What slower private credit means for government vision

It poses a threat to government vision of achieving 8.19% GDP growth in the current fiscal as well as materialize the double digit GDP growth by 2025.

“The present economic indicators does not speak in favour of an 8.19% GDP growth projected for the current fiscal year,” Zahid Hussain, former lead economist at World Bank Dhaka office, told Dhaka Tribune. 

On top of that, slower private credit growth raised question as to whether Bangladesh would be able to retain the growth it attained in the previous year, said Zahid. 

In the last fiscal year, Bangladesh registered 8.15% GDP growth, which was 7.86% in FY18. 

Even, if the government would be able to retain 23% private investment to GDP in the current economic scenario was uncertain as imports and private credit growth fell to single digit, he observed. 

Not only the GDP growth, the sluggish private investment will jeopardize the government vision of LDC graduation.  

“Since the prevailing situation of the stock market is not favourable for drawing funds from there for investment and reinvestment from profits is slow, slower growth in private credit will badly impact the economy,” Professor Mustafizur Rahman, a distinguished fellow of Centre for Policy Dialogue (CPD), told Dhaka Tribune. 

Why private credit growth fell 

“Lending capacity of private banks has contracted due to large volume of default loans, while demands of private credit have also been down as the business is going through a sluggish trend,” Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, told Dhaka Tribune.

As a result, private credit growth came down to single digit, claimed Mahbubur. 

However, the private sector people, who talked to Dhaka Tribune on private investment and credit growth, refuted the claim that there was less demand. They rather blamed liquidity crisis and conservative approach of banks.    

“With a view to expanding production capacity, I established factory and shifted it from rented space to a designated building in 2017. But I could not expand business due to shortage of fund,” Kazi Sazedur Rahman, owner of KPC Industry, told Dhaka Tribune.

As of September 2019, NPL stood at Tk1,16,288.31 crore, the highest ever.

On the other hand, the promised single digit interest rate is yet to be implemented, which is a reason for the lower credit growth as business with the high rate is not viable.   

For the third time, the government shifted implementation of single digit lending rate to April this year.      

Meanwhile, economist also blamed the non-performing loans and government borrowing for the fund crisis and slower credit growth. 

“With soaring NPLs, government’s aggressive borrowing from banks caused fund shortage dragging down the credit growth,” Policy Research Institute (PRI) Executive Director told Dhaka Tribune.

For the current fiscal year, the government set the target to borrow Tk47,364 crore from the banking sector but the government already borrowed Tk47,139 crore as of December 9, 2019.

How to improve credit flow and investment

“Reforms in banking sector is the key to improving financial health of banks. While good governance and curbing political influence on banks is crucial for bringing discipline in the sector and stopping bad loans,” AB Mirza Azizul Islam, former finance advisor to a caretaker government, told Dhaka Tribune.  

If these could be ensured, he added, the fund flow would increase pushing private credit growth up. 

Businesses for diversification in investment and focus on SMEs     

“It is a common trend in Bangladesh that every one moves for a single sector, which already has over capacity,” Bangladesh Chamber of Industry (BCI) President Anwar-ul Alam Chowdhury Parvez told Dhaka Tribune.