Government bank loans rise due to lower sales of savings tools

Public borrowing from the banking sector has increased rapidly during this fiscal year, mainly due to lower investment by individuals and businesses in national savings tools, a development that could crowd out the private sector.

The government took loans to the tune of Tk 22,344 crore from banks between July 1 and December 14, according to data from the Bangladesh Bank. He borrowed Tk 26,078 crore last year.

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Although the acceleration in borrowing has not yet had a negative impact on the private sector, it could lead to a credit crunch in the banking sector in the coming months if the current trend in government borrowing persists.

The government has set a bank lending target of Tk 76,452 crore for the current fiscal year.

The increase in government borrowing is largely the result of individual investors and companies abandoning national savings instruments after the Ministry of Finance reduced the interest rate on savings certificates and bonds. employee obligations of 1 to 3 percentage points for investment above 15 lakh Tk in September. .

Between July and October, net investment in savings tools amounted to Tk 9,325 crore, down 40% year-on-year.

Ahsan H Mansur, executive director of the Bangladesh Policy Research Institute, said government borrowing from the banking sector had so far had no negative effect on the private sector.

“But, the current trend has signaled that borrowing will resume in the coming days. But if the government borrows heavily from the banking sector, it will exacerbate the existing liquidity stress. The government should therefore prepare to avoid such a situation.”

If liquidity stress worsens, banks could find it difficult to meet the credit limit put in place by the central bank since April last year.

Mansur said the government should consider removing the 9 percent interest rate cap on loans to ensure a steady flow of credit to the private sector.

“Foreign loans and aid can play an important role in helping the government reduce its dependence on bank loans to meet expenses,” Mansur said, adding that Bangladesh had not been able to manage a sufficient amount of money. low cost loans.

The government will find it difficult to get cheap loans and aid if it does not reform the financial sector to align it with global best practices, he said.

Mustafizur Rahman, distinguished member of the Center for Policy Dialogue, says the downward trend in investment in domestic savings tools has forced the government to borrow more from the banking system.

“The government should ensure the proper use of funds, otherwise the debt burden will adversely affect the economy.”

The government and the central bank should ensure that the private sector does not face any obstacles when investment demand picks up, Rahman said.

Credit growth in the private sector has risen sharply in recent months as the economy is in full swing, shaking off the impacts of the coronavirus pandemic.

Credit growth accelerated to 9.44% in October, the highest in 13 months, overcoming the sluggishness it faced just after the virus hit the country’s shores in March of the year last as demand plummeted.

One of the factors behind the increase in public borrowing could be the acceleration of the implementation of large development projects, which had come to a halt after the pandemic struck Bangladesh, said Emranul Huq, chief executive of the Dhaka Bank.

However, the banking sector is still not facing a malaise due to the increase in public borrowing. Indeed, demand for term loans, with a repayment term of more than a year, has not yet gained the expected momentum, he said.

Post-import finance, a short-term credit facility available to importers, is increasing as letter of credit settlement has increased to a large extent as the economy recovers.

Between July and October, import payments amounted to $ 23.90 billion, up 51.4% from a year ago.

According to Huq, the pressure on liquidity in banks would intensify if export revenues and remittance flows did not increase.

Exports surged in November to $ 4.04 billion, reflecting strong demand for garments from Bangladesh. But the remittance flow fell 25% to $ 1.55 billion during the month, the lowest since June 2020.

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