Lending rate based on SMART: A positive step to move forward

Bithe Rani Aich :

A smart economy with inclusive growth is the precondition for implementation of the initiative of ‘Smart Bangladesh’ and a proactive banking sector can predominate an economy smartly.

Bangladesh Bank has picked by studying analytically SMART as a basis for the lending rate of the banking sector with the aim of creating this sector compatible enough to sustain the emerging economy of Bangladesh.

However, all the market participants like lenders, borrowers, and also depositors might not be ready yet to become smart along with SMART-based lending rate.

SMART itself is an acronym for Six-Month Moving Average Rate of Treasury Bill, which is used for setting up the final lending rate of banks from July 2023. Bangladesh Bank uploads the SMART to its website on the first working day of each month by calculating the average of the last six months Treasury bill (T-Bill) discount rates.

Banks are instructed to add a margin with SMART for fixation of the lending rate considering the ongoing economic instability.

Before that, banks had been guided to use a cap on the lending rate at 9.0 per cent for loan pricing considering the economic condition derived from the effect of the COVID-19 pandemic from 2020 to the first half of 2023, changing that rate was an emergent as Bangladesh economy is going through a startling increase of inflation.

However, the whole banking sector of Bangladesh is going through a challenge with the imposition of SMART on lending rates till now.

Undoubtedly, the banking sector plays a significant role in the economic development of Bangladesh, especially by providing investible funds to both the public sector and the private sector majority of which come from public deposits.

Borrowing funds for depositors became quite difficult at 6 per cent as the rate of inflation was already 9.74 per cent in June 2023 and which was 9.93 per cent in November2023.

Although it has been expected to minimize the inflation level at 6 per cent within FY 2023-24, it seems next to impossible at this point.

On the contrary, BB has also increased the repo rate gradually to address the rising inflation.

Thus, banks are compelled to move away from the concept of single-digit (6 & 9 per cent) for settlement of their cost of funds and overhead as well as to overcome the damages of banking profitability for the prolonged period of low-interest rates.

It is observed from the table that SMART varies over time as evidence SMART was 7.1 per cent at the very beginning of July 2023 and which is 7.72 on December 2023 and along with SMART, a margin of 3 per cent was decided to sum up to finalize the loan pricing of the bank.

After that, Bangladesh Bank has decided to move up the margin to 3.5 per cent from October 2023 aligning with its decision to increase the policy rate to 7.25 per cent from 6.5 per cent to curb skyrocketing inflation.

Although financial participants initially welcomed the move, few arguments have been raised over this period and the financial market is on the fence now, on one hand, all borrowers are not ready to accept the high rate, on the other hand, the T-bill rate may go up a lot for the higher demand of short term fund.

Furthermore, each month variation in lending rate has gone beyond acceptance in some cases like loan disbursement to the Cottage, Micro, Small, and Medium Industries (CMSME) sector.

My take on this issue is the challenges will be handled in the short run, SMART will definitely help to impede inflation by bringing the money supply slightly down as it discourages businesses from borrowing money as well as investing indecisively.

Furthermore, the process of selecting loan prices is more market-driven as SMART is based on actual market conditions in line with that the money market will be expedient as commercial banks are getting more flexibility in setting their lending rate and avoiding risky investments.

Moreover, it is obvious to maintain a balanced spread between the lending rate and the borrowing rate to generate reasonable profitability for banks and it is expected that the spread between the lending rate and the borrowing rate will be reined through SMART as it reflects the true cost of funds.

On the other hand, the interest rate cap resulted in lower returns as low as 6 per cent for which depositors tend to be demotivated to credit their money to banks, therefore, the banking sector was suffering from the loanable fund crisis, particularly in the severe inflation scenario.

Withdrawal of interest rate cap restriction and synthesis with SMART for loan pricing will support the sector to overcome the crisis in the long run as well as trigger the economy to boost up.

Overall, the lending rate based on the semiannual weighted average discount rate of T-bills is a pivotal step toward fostering a more robust and sustainable financial system, which is also a prompt sign of market efficiency.

By emphasizing transparency and responsiveness to the financial system, it is highly expected to reduce lending costs, ensure the availability of credit, manage risk, and bring a positive impact on the Bangladeshi economy.

The lending rate based on SMART is certainly a fruitful initiative, taken by BB, to deal with the current market competition amid upward inflation.

The writer is Research Associate, Bangladesh Institute of Governance and Management (BIGM).