Interest about to get lower.
On August 2, both public and private banks of Bangladesh pledged to lower the interest rate on lending to single digit, that is, 9 percent and deposit rate to 6 percent from August 9, assured by the Finance Minister, Abul Maal Abdul Muhith himself. “If anyone does not do this after August 9 you can report it”, Finance Minister AMA Muhith told the reporters after a meeting with the chairmen and managing directors of banks. Muhith also added that the Prime Minister had given instructions that the lending rates should not be such that they discourage investment.
All state-owned enterprises (SoE) have promised not to demand more than 6 percent from banks for investing their funds with them in order to facilitate the long-delayed single digit interest rate for lending.
The development came after the banks were unable to cast down the interest rate to a single digit as promised would be done on June 20 because the deposit rate remained sticky upwards. Private banks told Finance Minister AMA Muhith last week that it would be impossible to curtail the lending rate to 9 percent if the SoEs do not keep their funds with private banks as among 57 banks in the country, 40 are private. Also, the interest rate on national savings instruments have to be lowered in line with the bank deposit rates to make single digit rates a success. The interest rate on national savings certificates will be gone through and reviewed on August 8 as the finance minister said.
Consequently, Muhith sat down with the chief executives of 17 SoEs including Wasa, BPDB, BPC, Petro Bangla, BTRC, Sadharan Bima Corporation and Jiban Bima Corporation at his secretariat office. Bangladesh Bank Governor, Fazle Kabir, Eunusur Rahman, senior secretary of the banking division, Abdur Rouf Talukder, finance secretary were present. Salman F Rahman, chairman of IFIC Bank and Nazrul Islam Mazumder, chairman of the Bangladesh Association of Banks, the platform of private bank directors were also present in the meeting where the SoEs agreed to demand 6 percent from banks for their invested funds.
The lowering of lending rate is long overdue as the government and the Bangladesh Bank have extended private banks a host of benefits in the last four months. The benefits consist of lowering of corporate tax, slashing of repo rate which is a short-term fund that the central bank gives to banks in case of cash shortfall and reduction in cash reserve ratio as the government moved to decrease the lending rate and ease their liquidity crisis.
Earlier, the BB slashed the repo rate by 75 basis points to 6 percent, making funds cheaper for banks. It also cut the cash reserve ratio by one percentage point to 5.5 percent. Private banks were also allowed to hold 50 percent of the funds of state agencies, up from the previous ceiling of 25 percent, a move that has led to its desired outcome, according to AMA Muhith. “There is no liquidity crisis in banks, they have plenty of funds now,” he added.
However, contrary to belief, a number of economists had then said the moves would make funds cheaper for banks. And the excess money supply would increase defaulted loans further as many banks frequently contravene the rules and regulations while sanctioning loans.
In recent years, the banking sector has been struggling to survive from the rising loans, capital shortfall and financial scams that emerged mainly from corruption and a lack of corporate governance.
Currently, Bangladesh’s private banks' lending rates situate between 10 percent and 16 percent while the deposit rates are below 6 percent. But the rates on fixed deposit schemes for three months to three years range between 5 percent and 10 percent. The rates are even above 10 percent in a few banks. To bring a single digit interest rate would be revolutionary that would prove to be beneficial for both the people and the banking system at the moment.
Aishwarya Nandini Mitra Editor, Economics
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