Lending rate maximum 9%, deposit 6%

All types of lending rates would be as high as 9% and deposit rate maximum 6% with effect from April 1, Finance Minister AHM Mustafa Kamal said on Monday.

“This is final. The maxiymum rate for lending will be 9%, and the maximum deposit rate will be 6%,” Kamal told reporters after a meeting with bank directors and chief executive officers at the Bangladesh Association of Banks (BAB) office at Gulshan.

He said the previous January 1 deadline to launch the new lending-deposit ratio scheme was deferred till April 1 at the request of bankers and directors.

Only interest rates on credit cards would remain outside the scheme, Kamal added.

“As the bank owners sought time, I have extended the deadline,” he told the media after the two-hour meeting.

However, no BB officials attended the meeting, raising question over the legitimacy and effectiveness of the new rates.

After taking the office, the finance minister had vowed to slash the lending rates to single digits while BAB leaders last year gave assurance about lowering the lending rate to 9% and deposit rate to 6%.

However, none of the pledges were implemented despite continued pressure from businesses and policymakers including from Prime Minister Sheikh Hasina.

Bangladesh Bank would soon issue a circular on the new regime of lending-deposit new rates, Kamal said.

BAB President Nazrul Islam Mazumder after the meeting said: “Now we have to implement the agreed formula on lending and deposit rates.”

Economists have voiced their concerns over the dictated lending rates, saying the forced rates will distort market fundamentals and affect the whole banking sector.

The BB last week at a board meeting decided to fix at 9% the lending rate for industrial sector with effect from January 1 next year.

The BB board made the decision based on the recommendation of a seven-member committee on single-digit lending and deposit rates.

BB Governor Fazle Kabir presided over the meeting where National Board of Revenue Chairman Md Mosharraf Hossain Bhuiyan, Financial Institutions Division Senior Secretary Md Ashadul Islam and BB Deputy Governor SM Moniruzzaman, among others, attended the meeting.

On December 12, the seven-member committee, headed by BB Deputy Governor SM Moniruzzaman, on ‘Single-digit Lending and Deposit Rates Implementation’ submitted its report to Bangladesh Bank Governor Fazle Kabir, strongly recommending a single digit interest rate for   industrial lending.

Besides industrial lending, the committee also recommended lowering the interest rates to single digits for cottage, micro, small and medium industrial (manufacturing) sectors

Readymade garment, textile, ship-building, ship-breaking and agro-based industries should also be included in the industrial sector, the recommendation said.

“If the central bank caps the interest rates on industrial loans, it may affect the whole banking sector,” said Dr  Zahid Hussain, former lead economist at the World Bank, Bangladesh. 

He said the credit flow to the industrial sector would decrease amid low interest of commercial banks in lending to the specified sectors at dictated rates. 

Corruption and credit abuse would increase and the credit would go to other sectors in the name of industrial loans, he apprehended. 

Zahid Hussain suggested that the government and the central bank rather focus more on reducing the high amount of defaulted loans. 

Interest rates on lending would be reduced if the high amount of defaulted loans was lessened, he added. 

The bad debts of banks rose by a staggering Tk3,863.14 crore in three months till September this year, taking the amount of stressed loan in the banking sector to Tk1,16,288.31 crore despite huge facilities in place to regularize  default loans.

The amount of industrial term loans stood at Tk2,43,825.17crore as of June 30, 2019, according to BB data. 

December 1 this year, the central bank formed a seven-member committee, headed by SM Moniruzzaman, a deputy governor of the Bangladesh Bank, to bring down the interest rate to single digits following an instruction from the finance ministry. 

In June last year, the Bangladesh Association of Banks (BAB) first announced that they would bring down the lending and deposit rates to 9% and 6% respectively by July of the year. 

But, none of the rates came down, and banks blamed it on the deposit rates being sticky upwards.