Disconcerting fall in rural credit

In the last quarter of 2023, the country's banks experienced a sharp decline in rural deposits for the first time in five years, reveal the Bangladesh Bank (BB) data. At that time, the phenomenon was ascribed to erosion of savings capacity of the rural people due to sustained high inflation. Also, trust-deficit of rural savers played its part, particularly following scams in some banks.The situation called for working hard by banks to restore rural investors' confidence in banking service. But now the picture has reversed. Far from extending banking service to remotely placed rural clients, commercial banks are reportedly reducing credit disbursement to them. The banks are also closing down branches in rural setting in a bid to, what they argue, cut costs. Obviously, this will affect rural economy badly, especially by way of depriving the cottage, micro, small and medium enterprises (CMSMEs) of the formal credit crucial for their survival and growth. Small farmers, too, will suffer. However, the banks are blaming this on high cost of fund coupled with sustained high inflation. In their view, this has diminished rural borrowers' demand for credit. So, they find it unprofitable to continue their operations in rural areas.

However, the rural clients are being served all the same through agent banking, bankers try to justify. But the question is, how far agent banking will be able to meet the gap when the banking resources are witnessing a significant transfer from the countryside? Oddly though, these arguments of costly funds or inflationary pressure do not seem to apply when it comes to those banks' operation in the urban areas. In fact, the volumes of their credit disbursement have meanwhile seen a quantitative jump in their urban branches. That, in other words, means, banking resources are now being used to serve the rich but credit-hungry urban customers who are ready to pay interest at a very high rate, a move that flies in the face of the government's policy of ensuring adequate fund flow to promote financial inclusion of the underserved in the countryside.

A report carried by this paper on Monday last speaks volumes for that. Citing data from the BB, the report says that, of the total investments amounting Tk14.05 trillion that commercial banks made in different sectors of the economy till March last year, the share of the rural areas was Tk1.68 trillion, which is equivalent to 11.97 per cent of the entire bank investments. As expected, the rest of the money amounting to Tk 12.37 trillion, which is 88.03 per cent of the total credit advanced, went to the urban clients. The rural credit shrank to Tk1.24 trillion, or around 8.0 per cent of the total bank credit by December 2023. Contrarily, the urban share of the bank funds increased to 92 per cent of the total credit. The shrinking of the formal rural credit's share in rural economy seems irreversible as it came down to 7.95 per cent by the end of March this year. According to the BB data, the share of bank deposits by rural savers, too, dropped markedly during the period under review.

Implications of such a turn of events are disconcerting. Shortage of formal credit will compel businesses in countryside to turn to informal sources like loan sharks. That would be bad news for rural entrepreneurship, employment and growth. Banking reappraisal is a must.