New lending rate for FIs
Mir Mahmudul Haque Chowdhury :
Financial Institutions (FIs) are rendering dedicated services to the customer for generating profit. The principal functions of a bank are to collect deposit from surplus portion (i.e. from depositors) and supply the collected fund to the deficit portion (i.e. to the loanee). Simply banks play a role of media for fund management with full of trust and by adding a certain interest. So, Banks have to borrow money from the public with a stipulated interest rate for supplying it to the loanee.
Usually, banks provide the fund to the customer by disbursement of various types of loans with a predetermined interest rate. Interest rate is the amount paid to the investor for use of money or fund. Generally, lending interest rate is determined by adding operating expenses and profit margin with borrowing rate from public. The added portion is commonly known as spread. So, spread for a bank is the difference between the rates of lending and borrowing. As per directives of Prime Minister, both public and private banks decided to lower the lending rates to single digit from April-1, 2020. Then, banks fixed the deposit rate to maximum 6 percent and lending rate to maximum 9 percent.
Before implementation of single digit, private banks lending rates were 10 percent to 15 percent whereas, the deposit rates were 6 percent to 11 percent. Generally, banks provide higher deposit rate to fixed deposit and scheme deposits which is not changeable before the maturity of the said deposit. Banks loose a huge number of deposit when implement 6percent deposit rate. That time, the depositors prefer sanchayapatra, postal savings certificate and other government bonds for having attractive interest rate of more than 12 percent.
Bangladesh’s economy is facing various struggle including inflationary, liquidity, and exchange rate pressures over the past few months. To overcome these challenges, the central bank has already taken various policy initiatives, which include raising the policy interest rate and continuing the repo and liquidity support facilities for Banks and Non-Bank Financial Institutions. It discouraged imports of luxury and non-essential commodities, enhanced facilities to improve export receipts and inward remittances, and engaged with commercial banks and NBFIs to deal with non-performing loans and good governance issues.
The inflation rate was 9.94 percent in May-2023, which was the highest in a decade, and then it slightly downward and stands 9.74 percent in June. The inflation rate was 9.52 in August, which was that times highest inflation rate, then dropped to 9.1 percent in September, 8.91 percent in October, 8.85 percent in November and 8.71 in December 2022. The withdrawal of deposit rate ceiling and raising policy rate are welcoming steps for reducing inflation. At this stage, concern is non-performing loan. In 2020 when single digit interest was introduced in Bangladesh, the non-performing loans were 7.6 percent of the total outstanding loan, which swelled to 9.36 percent by the end of 2022.
The International Monetary Fund (IMF) has suggested that the Bangladesh Bank go for a flexible interest rate targeting-based monetary policy as the existing model has been unable to check inflation through money supply rather than external factors. IMF believes that the new policy will give some relief to an economy facing major challenges like a massive rise in inflation, liquidity crunch, significant devaluation of currency, rise of non-performing loan and a drop in US dollar reserves.
Bankers have been demanding the removal of the interest rate limit for a long time as they are not able to increase interest on deposits due to the 9 percent interest limit on loans. Currently, banks are not able to take deposits with high-interest rates due to the effect of high inflation, which reduces the tendency to save. As a result, the banks are finding it difficult to disburse loans as well.
In January, the Bangladesh Bank relaxed the lending rate cap for consumer loans and allows banks to hike it up to 3 percent but other loans will be within the cap of 9 per cent. After this step of Bangladesh Bank, the analysts and economists have been recommending for withdrawal of lending rate cap for all loans, but the central bank has paid no heed to withdraw the cap. At this situation, some commercial banks raised the interest rate to attract depositors unofficially.
Later on, In June, Bangladesh Bank announces new policy for lending rate known as the ‘SMART” (six-month moving average rate of Treasury bill) which will be declared monthly through the BB website with a margin applied for banks and non-bank financial institutions (NBFIs). According to the new policy, SMART plus a margin of up to 3.00 percent will be applicable for banks and SMART plus a margin of up to 5.00 percent will be applicable for NBFIs. However, the lending activities for CMSMEs and consumer loans may be subject to an additional fee of up to 1.00 per cent to cover supervision costs and there will be no changes in the interest rates applicable to credit card loans.
As per Bangladesh Bank report, Six months Moving Average Rate of Treasury bill (SMART) is 7.10 percent in June-23. It was 7.13 percent in May, 7.10 percent in April, 7.07 percent in March, 7.04 percent in February and 6.96 percent in January. So, as per new policy lending rate will be 10.10 percent for banks and 12.10 percent for NBFIs.
As per Bangladesh Bank directives the 3 percent corridor is not fixed, it is variable rate and will be revised when necessary. It is observed that at least 1 percent rate to be revised for the Banks and NBFIs in lending. As per new policy, banks can revise lending rate from July-1 but the challenge is here that how the Banks and NBFIs manage the changing of lending rate.
(The writer is a banker).
