Daily Advisor

Situation Private credit expansion has collapsed to a pace that signals deep distress in investment and working capital demand. The fresh data, arriving days after a 50-basis-point policy rate cut, show that the central bank’s monetary easing has not yet arrested the slide. The rate decision, effective 2 August [Dhaka Tribune, August 2, 2026], was designed to stimulate borrowing, but credit growth in June fell to a level not seen in three decades. With inflation still elevated, the risk is acute that businesses postpone expansion, severing the link between the repo cut and real-economy activity. The moment demands a sequenced package that forces banks to transmit the easing, unblocks supply-side credit bottlenecks, and injects cash flows into firms whose working capital cycles have stalled.

Evidence Private sector credit growth dropped to 4.47 percent year-on-year in June 2026 [The Business Standard, August 4, 2026], down from 4.98 percent in May 2026 [The Daily Star, August 6, 2026]. This June reading is the lowest in 33 years, meaning since 1993 [The Daily Star, August 6, 2026]. Point-to-point inflation, though easing slightly, remained high at 9.16 percent in June after 9.42 percent in May [The Daily Star, August 6, 2026]. On the policy front, Bangladesh Bank lowered its benchmark repo rate from 10.00 percent to 9.50 percent, effective 2 August [Dhaka Tribune, August 2, 2026]. The Standing Lending Facility rate was reduced from 11.50 percent to 11.00 percent, while the Standing Deposit Facility rate was kept unchanged at 7.50 percent [The Business Standard, August 4, 2026].

Prescription

1. Within ten working days, Bangladesh Bank must issue a directive mandating that all scheduled banks reduce the weighted average lending rate for fresh private-sector loans by a minimum of 50 basis points, explicitly linking the reduction to the 2 August repo cut. The directive should require a compliance report by 15 September 2026 and stipulate that future repo adjustments will carry automatic, formula-based minimum pass-through requirements. This directly transmits the 9.50 percent policy rate [Dhaka Tribune, August 2, 2026] to borrowers.
2. Bangladesh Bank should immediately introduce a temporary relaxation of loan classification and provisioning rules for new working capital facilities extended to manufacturing and agro-processing enterprises, effective until 31 December 2026. For such fresh credit, the central bank can defer the classification downgrade trigger by 90 days and reduce the provisioning requirement by half during the deferral period. This mechanism addresses bank risk aversion rooted in already strained balance sheets without weakening prudential norms permanently.
3. The Ministry of Finance, jointly with Bangladesh Bank, must operationalise a targeted partial credit guarantee scheme for import-substituting and export-oriented small and medium enterprises, using headroom within existing financial-sector support envelopes. The guarantee should cover 50 percent of the credit risk on new loans up to a per-borrower ceiling, with a simple claim process, and be announced by early September. This shares the risk weighing on lenders given June inflation of 9.16 percent [The Daily Star, August 6, 2026].
4. The National Board of Revenue shall, within the next fiscal circular, extend the reduced corporate tax rate to banks that raise their private-sector loan-to-deposit ratio by at least two percentage points over the September–December 2026 average relative to the June 2026 baseline. The circular should explicitly penalise excessive investment in government securities beyond the statutory liquidity requirement by excluding those banks from the concession. This tax-expenditure tool nudges liquidity out of risk-free assets without requiring new expenditure.
5. The Ministry of Finance must clear all verified payment arrears owed to private suppliers and contractors for completed infrastructure works, with the first tranche released by end-August. These payments inject cash directly into corporate operating accounts, reviving transactions demand for credit and breaking the working-capital freeze. The Finance Division should prioritise small-value bills to reach a large number of firms quickly.

Risks and tradeoffs The binding constraint is that banks may resist passing on the repo cut because non-performing loan portfolios make them reluctant to expand credit even at lower rates. The temporary classification relaxation, if not strictly time-bound and audited, could weaken asset quality transparency. The credit guarantee scheme requires rapid operational capability within Bangladesh Bank and the scheduled banks; delayed rollout would miss the immediate liquidity-crunch window. Inflation, at 9.16 percent [The Daily Star, August 6, 2026], could re-accelerate if the easing adds demand pressure before supply chains normalise, forcing a premature reversal of the 9.50 percent policy rate [Dhaka Tribune, August 2, 2026]. Clearing arrears can strain the fiscal envelope if revenues remain below target, and poorly targeted guarantees may create moral hazard if banks lend to non-viable firms. On the other hand, doing nothing while credit growth slides further from the 4.47 percent June reading [The Business Standard, August 4, 2026] risks locking in a low-growth equilibrium that feeds back into higher defaults.

Bottom line The credit growth floor has not yet been found; the June 2026 figure of 4.47 percent is a 33-year trough that demands immediate, enforced pass-through of the 50-basis-point repo cut alongside measures that restore loan supply and firm-level cash flows. Without a synchronised push across monetary, prudential, fiscal, and tax instruments within the coming weeks, the policy rate reduction to 9.50 percent risks becoming a symbolic move that fails to lift private-sector borrowing from its historic low.