Bangladesh's policy rate cut may fail to address private credit slump: Report
New Delhi, Aug 6
Bangladesh's central bank last week trimmed its policy rate by 50 basis points to 9.5 per cent to ease funding costs for distressed lenders but it may fail to check an "alarming slowdown in private investment," a new report has said.
The report from Hong Kong-based Asia Times said the cut aimed to address weak corporate demand, with credit to private firms expanding just 4.98 per cent YoY in May, down from 7.17 per cent the previous year.
The credit growth was at "a sluggish pace for a country aspiring to rapid industrialisation."
Meanwhile, public sector credit surged 20.78 per cent, the report added, signalling that state borrowing has become the main engine of domestic credit creation.
"Lowering central-bank funding costs is intended to reduce commercial lending rates and render stalled capital projects viable once again. However, the true impediment to expansion is not the price of money, but a dearth of viable corporate demand," the media house said.
However, monetary easing has some limits to revive credit demand as infrastructure shortfalls, frequent gas and power interruptions may not revive stalled projects.
Similarly, non-performing loans climbed to nearly 5.89 lakh crore taka ($47.65 billion) by late March, exceeding 32 per cent of total outstanding loans, which could discourage lenders from extending new loans.
"Aggregate liquidity masks deep institutional fragility, leaving weak banks incapable of extending productive credit regardless of central bank policy," the report said.
Downplaying the effect of a modest half-point reduction in borrowing costs, the media house said that "the financial penalty of idle capacity, backup diesel generators, and missed export deadlines far outweighs minor savings on bank loans."
The World Bank estimated that the system's capital-to-risk-weighted-assets ratio dipped to -2.6 per cent by 2025-end. Lenders burdened by bad debts are tempted to hoard capital, restrict lending to a narrow tier of safe blue-chip clients, or buy government securities.
— IANS
Reader Comments
As a neighbour, we genuinely want Bangladesh to succeed economically. But this report highlights something important - good governance and a healthy banking system are essential for growth. When public sector credit grows at 20% while private credit languishes, it shows the government is crowding out the private sector. Hope they fix their institutional weaknesses soon. 🙏
Interesting perspective but let's be fair - every developing nation goes through these struggles. Bangladesh has made remarkable progress in textiles and remittances. The real issue here is that their banking sector has become too political. Our own banking history in India has had similar phases. It's about how quickly they can clean up this mess and restore confidence.
The point about power cuts and infrastructure shortfalls really stands out. My company has operations in Dhaka and the constant load-shedding makes it impossible to plan production schedules. Businesses need to run factories consistently - not just cheaper loans. The backup generator costs add up very quickly, as the report mentions.
The Asia Times report is spot-on. A 50 bps cut is mere optics when the system's capital ratio is actually negative at -2.6%! Weak banks simply won't lend, policy rate or not. Bangladesh needs a massive banking sector cleanup similar to India's IBC framework. Otherwise, this is just papering over structural cracks.
Looking at this from an economic perspective, it's a classic liquidity trap. With NPLs exceeding 32%, banks have no appetite for risk. The government needs to address the NPL crisis head-on, maybe
We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.