Private sector credit growth picks up in May -- on paper

Private sector credit data appears to have gone against the grain in May.

For 24 months on the trot, private sector credit growth was lesser than in the previous month. And the trend was expected to continue given the overall doom and gloom on the economy.

But in May, it edged up to 8.86 per cent from 8.83 per cent a month earlier, according to data from the central bank.

"This is not the turnaround that we are desperately waiting for," said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.

In May, economic activities started on a limited scale and both the central bank and the government began to release funds from the stimulus packages for businesses.

For instance, garment factory owners took out funds from the Tk 5,000 crore package allotted from them to provide the salaries of their workers, he said.

Banks had started disbursing loans and opening and settling the letters of credit on a limited scale since May, which also helped push the credit growth, said MA Halim Chowdhury, managing director of Pubali Bank.

"We should take the situation into account while considering the private sector credit growth figure in May," said Mansur, a former economist of the International Monetary Fund.

The credit growth will increase in the true sense once the country gets relief from the pandemic after the vaccine for COVID-19 is invented. 

Another reason for the uptick is the banks' opting for interest capitalisation in response to the central bank order to not classify any types of loan until September with the view to cushioning the blow for borrowers from the ongoing economic mayhem, said Mansur, also the chairman of Brac Bank.

Interest capitalisation is the addition of unpaid interest to the principal balance of a loan. The subsequent interests are calculated on this new amount, meaning the loan balance increases over time and borrower ends up with a larger loan amount.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, echoed the same as Mansur about the effect of interest capitalisation on May's credit growth figure.

Although banks traditionally calculate the interest capitalisation at the end of every quarter, many lenders have perhaps adopted the method in the middle of the quarter given the ongoing terrible situation.

"The stimulus packages and credit relaxation on borrowers are good in the interest of keeping the wheel of the economy moving. But this time the increased credit growth will not contribute to the economy," said Rahman, also a former chairman of the Association of Bankers, Bangladesh, a forum of managing directors of banks.

In fact, given the government's increasing tendency to borrow from the banking sector, the private sector might be crowded out from funds altogether.

The undetermined state of the coronavirus epidemic curve in Bangladesh also suggests that economic activities cannot begin in earnest anytime soon. So, May's figure seems like a blip in the narrative of private sector credit growth rather than a harbinger.