Private credits grow despite banks' liquidity hardship

Private-sector-credit flow grows marginally, as per latest account up to October, in a reversal of previous low ebb amid liquidity crunch.
Pre-election credit rescheduling to meet prerequisite for averting loan default and resultant nomination rejection and dry-season demand are seen among the spurs that helped in turning the corner.
After months of downward trend, private-sector-credit growth went up by 0.40 percentage points to 10.09 per cent in October last by official count, notwithstanding prevailing liquidity stress in the banking sector.
In the previous month of September, the credit growth for private- sector players in the national economy was 9.69 per cent.
Officials, bankers and economists term such turnaround in the demand for formal credits by the private entrepreneurs 'unusual', especially as the development comes ahead of the 12th parliamentary election when the commercial banks generally practice cautious or non-aggressive banking operations to avert possible buildup of non-performing loans (NPLs).
Behind the rise in private fund flow, they point out some specific factors, including loan-rescheduling activities of the bad loans by big borrowers ahead of the polls, meeting the annual target of advances to stabilise banks' balance-sheets and post-rainy-season turnaround when the private-sector-credit demand normally goes on an upturn.
The credit flow had been on the upturn since early FY23, reaching 14.07 per cent in August. However, the trend reversed thereafter, with figures recording 13.91 per cent, 13.91 per cent, 13.97 per cent, 12.89 per cent and 12.62 per cent in September, October, November, December and January respectively.
The private-credit growth further plummeted in the subsequent months, with figures of 12.14 per cent in February, 12.03 per cent in March, 11.28 per cent in April, 11.10 per cent in May, 10.57 per cent in June, 9.82 per cent in July, 9.75 per cent in August and 9.69 per cent in September, according to Bangladesh Bank data.
Seeking anonymity, a BB official said the private credit growth increased to over 10 per cent in October even though the liquidity tightness in banks is still in place.
"Fund flow into the private sector normally goes up soon after the rainy season, especially from the second quarter of a financial year, with resumption of development activities like construction, which could be a reason," the central banker says.
Normally, many of the big borrowers go for the rescheduling of their bad loans to avert loan-defaulter tag ahead of national elections, which might be another reason, he adds.
"For example, if anyone became defaulter of loan amounting to Tk 1.0 billion and he/she wants to take part in the election and needs more funds, he/she will be approved fresh loan of Tk 1.30 billion through rescheduling and clearing a significant part of the dues."
Seeking anonymity, a top executive of a private commercial bank termed the credit rise in the private sector 'unusual' as most of the banks seem to be very cautious in approving loans ahead of the elections when the liquidity in banks is under immense stress.
"I think this (the rise in private credit growth) is coming more from interest accrual. Number may be from sharia banks disbursement. So, we need to check which banks have made more disbursement of loans now," says the banker, seeming indicating a riddle.
Managing director and chief executive officer of Dhaka Bank Limited Emranul Huq told the FE writer that every bank has annual target of deposit and advance. As the year is set to end very soon, there might be some banks which have not fulfilled the target yet.
"So they might start releasing funds to the good borrowers who need money for their business purposes, and it could be a reason."
The top executive also notes that the dry season has already started and the development works, which remained stuck during the rainy season, will start getting pace now. "This could be another reason."
When contacted, former lead economist of World Bank's Dhaka office Dr Zahid Hussain said rescheduling principal-plus-interest of some large loans could have caused the slight rise in private-credit growth.

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