Private sector credit growth stays below 5% for six months

Private Credit Demand Remains Weak as Businesses Hold Back Investment

Bdbusinessdaily.com – Bangladesh’s private sector credit expansion remained subdued at the end of August, extending a six-month period in which annual growth has stayed below 5%. The latest figure reached 4.75%, reflecting continued caution among businesses facing soft demand, high financing costs and pressure from energy-related expenses.

The pattern has been consistently weak throughout the period. Private credit growth was 4.72% in March, edged up to 4.75% in April and 4.98% in May, then declined to 4.47% in June before recovering slightly to 4.62% in July. August’s 4.75% reading showed only a modest improvement, rather than a decisive turnaround in borrowing appetite.

Credit growth is often watched as an indicator of how willing companies are to expand operations, purchase equipment, build capacity or launch new projects. When businesses borrow less, it can signal that they do not yet see sufficient demand to justify major investment. In the current environment, many firms appear focused on protecting existing operations instead of committing funds to large new expansion plans.

Unused Capacity Limits Need for New Projects

Sohail RK Hussain, managing director of Bank Asia, said a meaningful rebound in private-sector borrowing is unlikely in the coming six months to one year. He pointed to a sharp fall in demand and lower use of existing factory capacity across sectors.

“Demand has fallen significantly. Due to low demand, capacity utilisation of factories has also declined. Since there is still ample unused capacity in the market across various sectors, large investments to create new capacity are not needed right now unless demand increases significantly. It may take another year for this type of investment to pick up,” he said.

His assessment highlights a central challenge for the economy: companies may be able to produce more with their current facilities, but lack enough sales momentum to warrant building additional capacity. In such circumstances, borrowing for expansion becomes less attractive, even for businesses that can still access bank financing.

Hussain also said many large corporate groups already carry substantial bank debt. With leverage high and consumption weak, their ability and willingness to pursue major new projects have been limited. Domestic demand and broader economic activity, he said, have remained sluggish for four to five years.

As a result, current capital spending is more likely to be directed toward repairs, maintenance and preserving existing production capability. That kind of expenditure can help companies continue operating, but it does not produce the same increase in credit demand as a new factory, a major industrial line or a broad-based business expansion.

Inflation and Interest Rates Add to Pressure

Persistent inflation remains another major obstacle. Higher inflation has kept the policy rate elevated, raising the cost of borrowing for companies and making investment calculations more difficult. Businesses considering loans must weigh projected returns against interest expenses that have become more burdensome.

Fahmida Khatun, distinguished fellow at the Centre for Policy Dialogue, said inflation must come down before policymakers can reasonably reduce the policy rate and support faster credit growth.

“Inflation must be brought down; otherwise, reducing the policy rate will not be possible, as expansionary monetary policy cannot be pursued,” she said.

She also stressed that controlling inflation depends on ensuring an adequate supply of goods. For businesses, the issue is not limited to financing costs. Higher energy prices and inadequate energy supply have raised operating expenses, while long-standing infrastructure weaknesses have added further uncertainty to investment decisions.

Although an elected government is now in place, Khatun said many businesses still lack the confidence needed to begin new ventures. Restoring that confidence will require more than lower borrowing costs. Companies also need a more dependable operating environment, including predictable energy availability and conditions that allow production and transport to run efficiently.

Banking Sector Constraints Affect Lending

The slowdown is not solely a question of demand from borrowers. Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, said large industrial groups have struggled and reduced production, which has naturally reduced their need for fresh bank loans.

He also noted that irregularities under the previous government left only a little more than 15 banks in sound condition. That has weakened the banking sector’s overall capacity to extend credit, particularly at a time when companies may need carefully structured financing to recover from financial stress.

A healthier lending environment requires both capable banks and viable borrowers. If financially stressed firms cannot operate efficiently or sell enough output, lending more money alone may not solve their problems. Equally, businesses with credible recovery plans need access to financing that is affordable and properly targeted.

Reviving Distressed Industries

Bankers believe credit growth can improve if sick and closed industrial units are brought back into operation through stronger investment, lower interest costs and the entry of new investors. Lower inflation could help create room for reduced lending rates, while renewed business activity could increase loan demand across manufacturing, trade and related services.

Mahbubur has argued that bringing inflation under control is essential to encouraging fresh investment. For heavily indebted firms, however, recovery may also require restructuring support and investors willing to provide new capital.

Hussain said businesses whose loans are still classified as performing but whose factories are closed or under strain should receive support through investment partnerships and appropriate assistance packages. He identified the Tk20,000 crore package for sick industries as a potentially important tool.

If used effectively, the package could lower interest and operating burdens for highly leveraged companies and give them a path to restart production. But he cautioned that implementation will take time. Each company must be evaluated, its operational and financial needs identified, and borrowers themselves must take meaningful steps toward reviving their businesses.

The path to stronger private-sector credit growth therefore depends on a wider recovery in confidence and demand. Lower inflation, manageable financing costs, improved energy conditions, healthier banks and credible business revival plans will all matter. Until those factors begin to align, companies may continue to prioritise survival and efficiency over large-scale new investment.