Lending rate record low, yet banks not getting borrowers

Money is now cheaper ever in Bangladesh and can be availed at as low as 7% interest. Yet, the loan demand is comparatively lower, a situation that bankers have never seen.

Such a condition is not only negative for bank profitability but also for the much-needed job creation as over 20 lakh youths enter the job market every year. Of them, 8 lakh are university graduates.

The ongoing assault of the Covid-19 pandemic for around a year is a major reason that holds back businessmen to expand their businesses. But it is not the only reason. Rampant bribes by government officials concerned are also discouraging new investments, sector insiders believe.

As a result, the banks are getting over liquid and sitting on excess money — Tk 204,738 crore as of December 2020. The savers, on the other hand, are suffering as they are getting much less than the inflation rate — around 6%.

“The Covid-19 pandemic has had a blow on the businesses. Industries are not expanding which is why the credit demand is slow,” Ali Reza Iftekhar, managing director of Eastern Bank Limited (EBL), told the Business Insider Bangladesh.

The credit growth has gone down less than 9% from 16% earlier, he said.

Private sector credit growth continues to fall almost every month since the coronavirus pandemic hit the country in March last year.

The latest Bangladesh Bank data shows the credit growth fell to 8.32% in January 2021, even much lower than the central bank’s projection of 14.8% for the fiscal year 2020-2021.

“In my banking career I have never seen such a low lending rate,” said Abul Kashem Mohammad Shirin, managing director of Dutch-Bangla Bank. “There is hardly any investment opportunity,” he noted.

The lending rate has come down as low as 7%, according to bankers. Even, the rate could be below 7% for good borrowers. It was 11%-12% just before the Covid-19 pandemic.

“If we cannot increase our businesses, banks’ profits will drop this year,” said Shirin.

He said banks with excess liquidity used to earn some profits by investing the money in the BB bonds and call money market, but the yield from there is 1% only.

Why are businesses not investing?

“Coronavirus is a major reason and we are in uncertainty. Amid this situation, no businessman will go for new investment. Bribe at every stage is also a discouraging factor for investors,” said a businessman, not willing to be named, who has exposure in textile, automobiles and light engineering sector.

Impacts on the economy:

Dr Fahmida Khatun, executive director of Centre for Policy Dialogue (CPD), says growing joblessness is a big concern for the country.

If there was no new investment in the productive sector, there will be no new jobs, she says.

“No new job means no income, which will affect spending and consumption,” Dr Fahmida told the Business Insider Bangladesh.

Economy will also remain suppressed, said the CPD boss.