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Winners and losers of single digit interest rate

  • Published at 03:18 pm June 25th, 2018
  • Last updated at 12:24 am June 26th, 2018
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The single digit interest rate will futher exacerbate the liquidity crisis in Bangladesh Mahmud Hossain Opu

BAB decided to cut the interest rate on lending to 9% and that on deposits to 6% from the existing levels

The decision to cut down interest rates will likely discourage clients from depositing money in the banks and intensify the liquidity crisis, experts warn.

But businessmen say the move will boost investment.

The Association of Banks (BAB) decided to bring down the interest rate on lending to 9% and that on deposits to 6% from the existing levels. The new interest rates will go into effect from July 1. 

Currently, private banks are lending at between 14% and 15%, while the average interest rate for deposits is between 9 and 10%.

In a statement, the BAB said it took the decision under the direction of Prime Minister Sheikh Hasina to create an industry-friendly environment, new entrepreneurs, generate employment, and to accelerate trade.

However, former caretaker government advisor AB Mirza Azizul Islam fears that the move could worsen the liquidity crisis. 

“It will make people reluctant to deposit money. Many may withdraw their money and invest in other sectors such as savings certificates,” he told the Bangla Tribune.  

Azizul said the interest rate could have been brought down to a single digit by reducing the spread between the interest rates on lending and borrowing.

The banks’ deposit growth has declined to some extent, he noted, adding that slashing interest rates could trigger more liquidity crisis, which in turn could jeopardize the plan to reduce the lending rate.

“Only cutting down interest rates won’t do. We should also monitor whether the loan money is being used in productive sectors,” he added.

BAB Chairman Nazrul Islam Mazumder said they had fixed 6% interest on new deposits and noted that it would not cause any problems for the old depositors.

“We, the bank owners, are trying to bring down the interest rate to single digit. So are the banks’ managing directors and the government,” he added.

But South Asian Network on Economic Modeling (Sanem) Executive Director Prof Selim Raihan feared that the move could affect all clients.

“There’s no harm if the loan money plays a [positive] role in the national economy,” he said, adding that since there was lack of good governance in the banking sector, the initiatives being taken could deepen the sector’s crisis.

“The forceful reduction of interest on deposit to cut the interest on loans will affect the general people,” he added.

Selim said the recent decisions on the banking sector are not enough to tackle the sector’s crisis.

Declining deposit

The rate of deposit in the banking sector has been declining. The central bank data show that depositors have withdrawn nearly a thousand crore taka between December last year and March, 2018.

The total deposit in December last year was Tk9,26,179 crore. At the end of March this year, the amount stood at Tk9,25,279 crore.

Bank officials say the continued disbursement of loans and a decline deposit has led to liquidity crises in the banking sector.

Bangladesh Bank data show that more than 100 million account holders deposit money in 57 banks. The bank directors are mainly conducting their business with the money of these depositors.

According to the central bank, the bank directors had invested only Tk46,124 crore in the sector until September last year, while they withdrew Tk1,43,707 crore as loan from the banks during the same period.