Loans get costlier as BB sets 7.13pc reference rate

Staff Reporter :
The Bangladesh Bank (BB) has declared a reference lending rate of 7.13 percent for July, projecting an increase in interest rates for all types of bank loans, according to the central bank’s circular on Monday.
As a result, the lending rate for banks will rise to 10.13 percent with the addition of a 1 percent supervision fee, meaning the rate will be 11.13 percent for personal and car loans, both of which fall under CMSME (Credit to Micro, Small, and Medium Enterprises) and consumer loans.

Furthermore, the lending rate for agricultural and rural loans will increase to 9.13 percent, up from the existing 8 percent for farm loans and 9 percent for other types of rural loans.
However, the lending rate for credit cards will remain unchanged.

The reference lending rate, known as “SMART” (six-month moving average rate of Treasury bills), applies a margin for both banks and non-bank financial institutions (NBFIs).
Banks can apply a margin of up to 3 percent while the NBFIs can apply a margin of up to 5 percent over the SMART rate, according to Monetary Policy Statement (MPS) for H1FY24.
The sharia-based banks have also been instructed by the Bangladesh Bank to calculate profits according to the same rules.

According to a Bangladesh Bank gazette, the interest rate cannot be changed within six months of its imposition.
This means that even if the interest rate increases, the bank cannot raise it for existing customers.
Similarly, if the interest rate decreases, the customer’s rate will not decrease.

Earlier, in April 2020, an initiative was taken by bank entrepreneurs and businessmen to set the interest rate at 9 percent. Following that, the Bangladesh Bank issued a notification fixing the interest rate at 9 percent.
During the last monetary policy announcement on June 18, Bangladesh Bank Governor Abdur Rauf Talukder stated, “In 2020 the interest rate was at 16 percent to 17 percent in local banks, at that time, foreign loans were available at 2 percent interest. Due to this, the rate was fixed at 9 percent based on a political decision to reduce the cost of doing business.”
Considering the current situation, the interest rate needs to be increased. We have convinced the government, and therefore, the maximum interest rate ceiling is being lifted again based on a political decision, the central bank’s Governor expressed.
Zahid Hussain, former lead economist at the World Bank’s Dhaka office, commented that although the Bangladesh Bank has removed the interest rate cap to combat inflation, the move is still not market-driven as the rate’s formula remains under the central bank’s control.