The Bangladesh Bank is going to cap the interest rate on industrial and working capital loans at 9% as the government is desperate to boost private investment in the economy.
To make it happen, the central bank is set to place a proposal at its board of directors' meeting scheduled for Tuesday, as per a high official of Bangladesh Bank (BB).
The official said if the board members approved the policy, the central bank would issue a circular to the scheduled banks asking them to lend industrial loans at as high as 9% from January 1.
On December 12, a 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.
Talking to Dhaka Tribune, BB Executive Director and spokesperson Md Serajul Islam said: “The government and the BB will now device the next course of action keeping in mind the recommendations made by the committee.”
Besides industrial lending, the committee also recommended lowering the interest rates to single digits for cottage, micro, small and medium industrial (manufacturing) sectors.
Ready-made garment, textile, ship-building, ship-breaking and agro-based industries should also be included in the industrial sector, the recommendation said.
Defaulters should not be entitled to avail loans at 9% interest while borrowers with a record of regular payment should be able to obtain such loans, the recommendation added.
“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 growth 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 stress loan in the banking sector to Tk1,16,288.31crore despite huge facilities in place to regularize default loans.
The amount of industrial term loans stood at Tk 2,43,825.17crore 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.