Private sector credit growth: a symptom of deeper investment malaise

The exceptionally weak private sector credit growth of Bangladesh is a critical warning sign of a deeper private investment crisis.

It reflects a unique situation in which firms are reluctant to expand, banks are increasingly constrained or unwilling to take credit risk, borrowing costs remain high, public borrowing is absorbing financial space, and uncertainty over energy, inflation, external conditions, and the exchange rate continues to weigh on business decisions.

Impaired banking intermediation has become a central part of the problem. Banks are not simply passing deposits into productive lending in the way a normal credit system would be expected to do.

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Public sector credit growth hits 5-month high in Feb

Rising nonperforming loans, provisioning pressure, undercapitalisation, fragile depositor confidence, and liquidity constraints have weakened banks' capacity to lend, while uncertainty over borrower quality has reduced their willingness to extend fresh credit.

In effect, the banking system is becoming more defensive. It is protecting its balance sheets rather than supporting new investment.

On the demand side, firms have also held back. Many enterprises appear to have delayed investment decisions because of political uncertainty before the February 12 election, and the much-expected post-election recovery in confidence did not materialise quickly.

This hesitation was then reinforced by a more difficult external environment, including the conflict in the Middle East, higher fuel-price risks, and renewed uncertainty about global demand, imported inflation, and macroeconomic stability. For many firms, waiting became the safer option.

This is visible in the composition of credit demand. Weak demand for term loans, falling capital machinery imports, factory underutilisation, and limited appetite for fresh expansion all suggest that businesses are not merely facing expensive credit; they are also unconvinced about the returns from new investment.

Such indicators point to a broader investment pause, where firms may continue working capital borrowing for survival or routine operations but avoid long-term commitments.

Bangladesh has also experienced an exceptional phase of import compression. Imports rose to more than $88 billion in 2022 but have since fallen to below $70 billion.

While import compression may have helped contain pressure on the balance of payments, it has also carried a large domestic cost. Reduced imports of capital goods, intermediate inputs, and industrial raw materials are likely to have weakened production capacity, slowed factory activity, and constrained supply responses.

This is particularly important because lower imports do not automatically contain inflation if domestic supply is simultaneously disrupted.

On the supply side, banks have become highly cautious. Rising default loans, provisioning requirements, capital shortfalls, weak confidence, and liquidity stress have made many banks reluctant to take on new private-sector exposure.

Yet there is an important paradox. Some commercial banks have reported strong operating profits even as private sector credit growth has collapsed.

This suggests that part of the banking sector is earning from safer treasury instruments and balance-sheet operations rather than from the traditional business of financing productive enterprise. A banking system can appear profitable in accounting terms while still failing in its developmental function.

Expectations about interest rates may also have delayed investment. Many entrepreneurs appear to have anticipated that a change in central bank leadership would eventually lead to lower interest rates, and some may therefore have postponed borrowing decisions.

But rate cuts did not materialise, partly because the external environment remained fragile and inflationary pressure persisted. As a result, investment decisions were delayed without the expected improvement in financing conditions.

The overall situation is therefore quite unusual. Bangladesh is facing both weakened demand for credit and a lacklustre supply response from the banking system.

This combination risks pushing the economy into a low-equilibrium trap: firms are not investing because confidence is weak, banks are not lending because risks are high, production remains subdued because investment and imports are compressed, and slow activity then further weakens the case for new lending.

Breaking this cycle will require more than marginal changes in credit targets.

The recovery of private sector credit growth will remain difficult unless the government recognises the wider consequences of excessive borrowing from the banking system.

When public borrowing offers banks a safer and easier return, private enterprises are pushed further to the margins.

Restoring credit growth therefore requires not only lower inflation and a more stable exchange-rate environment but also credible banking-sector repair, disciplined public borrowing, improved confidence, and a clear policy signal that productive private investment will again be treated as the central engine of growth.

The author is an economist, who serves as chairman of the Research and Policy Integration for Development (RAPID). He can be reached at m.a.razzaque@gmail.com