The 'drought' in private sector credit growth now appears to be easing.Â
Until April last, the growth was 15.16 per cent on a year-on-year basis. Mr. Biru Paksha Paul, chief economist of the country's central bank, says the growth at the end of the outgoing fiscal year would exceed 16 per cent.Â
The private sector credit growth, according to statistics furnished in the latest budget speech of Finance Minister AMA Muhith, was between 11 per cent and 13.5 per cent during the last three financial years. So, the level of credit growth, as projected by the BB chief economist, does point to a reversal of the trend that has been persisting in recent years. The reversal, however, may be due to the presence of loopholes somewhere in the method about, or the mode of, calculating the credit growth in the private sector.Â
The private sector credit growth during seven financial years starting from 2005-06 varied widely, between 14.5 per cent and 25 per cent. For most of this period, the credit figure was based on borrowings by the private sector from domestic banks. No direct overseas borrowing by the country's private sector was allowed then. Such borrowings were allowed or approved by the government only during the recent years. And a substantial part of such borrowings has already been made by some big corporate or business houses in Bangladesh. However the people are still not in the know of things much about whether such borrowings from external sources are being properly serviced or not. Â Â
Meanwhile, the latest moderate increase in private sector credit, as the Finance Minister's figures in his budget speech indicate, is most desired by both local banks and government. The domestic banks have been awash with excess liquidity for quite some time. If there is higher demand from businesses for domestic credit, then the situation would certainly ease, to some extent, for them.Â
The government, however, has to look at the issue of private sector credit growth in the context of the national economy. Infusion of an increased volume of funds is supposed to fuel economic activities, which is the primary objective behind the government's fiscal stance, in tandem with the central bank's monetary measures. Â
The declining rate of interest is one, among many factors, that might have given rise to the growing appetite, as noted by the chief economist of Bangladesh Bank, among the private entrepreneurs and businesses for a greater volume of bank funds. The decline which has come at the cost of depositors, however, is still not up to the expectation of the businesspeople; they want it to be still lowered -- to the single digit. The average interest rate on bank loans until March last was 10.78 per cent.Â
The increase in private sector credit flow -- if that is the reality as far as borrowings from domestic banks are concerned -- would indeed be considered a piece of good news by all relevant quarters. However, the central bank is probing another very pertinent issue -- the destinations of bank funds. And to know the truth it has reportedly launched a study, lately.Â
What has transpired until now through the study is not quite that palatable for the economy. The most part of the outstanding loans until March last went to consumer financing, readymade garment sub-sector and other commercial activities. The demand for funds from most other 'real' sectors of the economy did not go up to the desired level. Â Â
The total consumer loans and the RMG sub-sector credits grew by nearly 15 per cent each and loans given for commercial purposes went up by 23 per cent during the first three quarters of the outgoing fiscal.Â
The industrial loan disbursement situation during the first half of the current fiscal year, was in line with what was witnessed in the previous fiscal. But the term 'industrial' does not always give a true picture of the purposes for which the loans are utilised.Â
Banks, naturally, would be more interested to invest their funds in areas that would give them the maximum amount of profit in the short-term. They are, generally, unwilling to lend for a longer period, unless the situation forces them to go for it. In the case of long-term lending they would demand from the borrowers the collateral befitting the sizes of the fund they lend. However, deviation may take place. But that might exact a heavy cost from the bank(s) concerned.Â
Now, the objective of the study that the Bangladesh Bank (BB) has launched, is to know the destinations of the funds that the banks are lending. The BB feels it is important to ensure flow of funds to the real sectors of the economy to help boost the economic growth and generate enough employment opportunities.Â
But the ground realities have to be favourable to get all the pious objectives met. The demand for funds from the entrepreneurs operating in the so-called real sectors of the economy would not generate automatically. The entrepreneurs would demand, among others, bank interest rates in single digit, enough skilled manpower, uninterrupted supply of power and gas, trouble-free political environment and a proactive bureaucracy.Â
Banks, on their part, are supposed to meet the demand for fund only. Â They have brought down the lending rates to some extent. And this has largely been done by lowering the rate of interest on deposits. This is a kind of financial repression, considering the fact that the real effective rate of return on most kinds of bank deposits in an economy like that of Bangladesh, has already turned negative as its rate of inflation is now higher than that of deposit rate in most cases. The developed countries can afford to accept negative rates of return on deposits. But this, in all fairness, is a 'luxury' for Bangladesh and that too a punitive one, for poor depositors who have few outlets to look for a reasonable rate of return on their hard-earned savings to cushion against inflation.Â
Yet then, it must be noted that the lending rates in Bangladesh do still remain high, compared to those in some other regional countries. Unless the interest rate spread -- the difference between lending and deposit rates -- is brought down and requirements for provisioning against a growing volume of bad loans are lowered, any reduction of lending rate at this stage in Bangladesh will mean further cuts in deposit rates, much to the chagrin of the fixed income groups and the ageing population.
Thus, there are lots of hurdles to lowering the lending rates further. Also it is not easy to create demand for bank funds in the 'real' sectors of the economy and to convince the banks to make available funds to them at lower rates of interest. This is a real conundrum, facing the Bangladesh economy now on the quest for raising the level of investment in its real sectors.
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