Bank loans flowing into government bonds

There is little to no demand for loans in the private sector. No major industrial group is initiating new investments, and large-scale projects remain stalled.

Businesses—both small and large—are minimizing operational costs just to stay afloat. As a result, demand for bank loans has declined significantly.

Commercial banks, unable to lend to the private sector, are now turning to investments in government treasury bills and bonds to keep their operations running.

Experts say that due to political instability, uncertainty in business, and global turmoil, investment inactivity has taken hold in the country. Scheduled banks now consider government bonds a safer investment option under these circumstances.

An analysis of commercial banks’ financial statements shows that over the past year, investment in treasury bills and bonds has increased by nearly 32%, while income from these investments has risen by about 45%.

An anonymous official from a private bank reported that although liquidity is available, there is no significant demand for large project loans from the private sector. As a result, many banks are expanding smaller consumer loan programs.

However, since banks must pay interest on depositors’ funds, a significant portion of that liquidity is now being invested in government treasury bonds and bills. These instruments carry lower risk compared to private sector loans, have no default concerns, and offer interest rates close to 11%.

While investments in government bonds are seen as safe, economists warn that this trend poses a serious risk to the overall economy. Dr. Mostafizur Rahman, Distinguished Fellow at the Center for Policy Dialogue (CPD), said: “It’s not that the private sector is being denied loans due to government bond investments—rather, the private sector itself is not seeking loans. Political uncertainty, a business downturn, and various other factors have caused the private sector to become inactive, and that’s a troubling sign for the economy.”

This investment inertia is further supported by data on the import of capital machinery and reduced private-sector borrowing. According to the Bangladesh Bank, private sector credit growth stood at 7.50% in April, down from 7.57% in March.

Additionally, from July to April of the last fiscal year, letters of credit (LCs) for importing capital machinery declined by about 27%. During this 10-month period, LCs worth $1.41 billion were opened for capital machinery imports, compared to $1.95 billion during the same period the previous year.

This drop in private credit and capital machinery imports indicates clear signs of investment stagnation. Analysts note that under the current conditions, private sector entrepreneurs are refraining from new investments. Even business expansion efforts are scarce; rather, industries in sectors like steel and cement are cutting costs just to survive.

Consequently, banks are seeing little demand for large loans.

Prof. Rahman added: “Although overall imports have increased slightly compared to last year, LC openings and confirmations for capital machinery remain in a negative state. This clearly shows that the investment climate is lacking.”