Fast forward a year and now most of the banks are offering their loans products, out of their own volition, at 7-8% interest
Hindsight is a beautiful thing. A little over a year ago, businesses and banks were sparring over single-digit interest rates on loans.
Businesses wanted the interest rate to be single-digit -- and the government sided with them, ordering banks to bring down the rate to 9 per cent from April 1, 2020.
The move essentially broke down the market mechanism for funds, which did not sit well with bankers and economists.
Begrudgingly, banks enforced the single-digit interest rate on lending within the stipulated timeframe.
Fast forward a year and now most of the banks are offering their loans products, out of their own volition, at 7-8 per cent interest -- a development that now vindicates the bankers and economists’ reservations about the interest rate cap.
The reason for the interest rates on loans slipping below the 9 per cent-mark is the largest pile of excess liquidity that they are sitting on thanks to the central bank’s expansionary monetary policy to prevent the high-flying Bangladesh economy from crashlanding for the global coronavirus pandemic, which upended lives and livelihoods like no other.
In other words, if banks have sufficient funds, the interest rates would come down automatically, as the law of demand and supply states.
In January, the weighted average lending rate of the 59 commercial banks stood at 7.56 per cent, down from 9.66 per cent a year earlier, as per the central bank’s latest data.
Of them, 29 banks’ weighted average lending rate is below 7 per cent and they are offering housing loans, agriculture loans and term loans to large and medium industries at a lower rate.
State-run Rupali bank is offering housing loans at 4 to 9 per cent, while Dutch-Bangla Bank is offering all types of loans at 7 to 9 per cent.
NRB Commercial Bank is offering working capital loans and consumer credit at 8.25 to 9 per cent, while all types of loans from BRAC Bank comes at 6 to 9 per cent. Southeast Bank’s lending rate between 8 to 9 per cent, as per BB data.
And yet, there is no demand for credit from businesses despite the 7 to 8 per cent interest rate on lending, which is reflected in the lacklustre private sector credit growth rates.
In January, the private sector credit growth stood at 8.32 per cent, down from 8.37 per cent in the previous month.
“There is no option other than reducing the lending rate as we will have to survive the competitive market,” said M Kamal Hossain, managing director of Southeast Bank.
The lending rate has to be reduced in order to retain good clients considering the market situation, he said, adding that the bank has brought down the rate to 8 per cent.
The bank will bring down the rate further as it has excess liquidity.
Even though the lending rate has come down, there is no demand for loans owing to the slowdown in the economy brought by the ongoing pandemic.
New investment and industrial expansion plans are on hold as businesses are observing how the pandemic unfolds, Hossain added.
BRAC Bank has reduced the interest rate for good borrowers, said its MD Selim RF Hussain.
But the interest rate on small- and medium-sized enterprise loans is 9 per cent now owing to the higher management costs for the segment.
“Most of the banks have reduced their lending rate to 4 to 5 per cent for good borrowers owing to the excess liquidity in the market,” Hussain added.
At the end of December last year, the excess liquidity in the banking sector stood at Tk 204,700 crore, which is the highest in recent times.
The central bank’s expansionary monetary policy was the main reason for the rising trend of excess liquidity in the banking sector.
Earlier in July, with the view to steering the economy away from a steep downturn, the BB rolled out a vastly expansionary monetary policy for fiscal 2020-21.
It slashed the repurchase agreement (repo) rate -- which is the rate that is used to signal the central bank’s monetary policy stance -- by 50 basis points to 4.75 per cent. Before the pandemic began in March, it was 6 per cent.
The BB also cut the reverse repo rate by 75 basis points to 4 per cent and the bank rate by 100 basis points to 4 per cent.
A reverse repo agreement is the purchase of securities with the agreement to sell them at a higher price at a specific date in future. In Bangladesh, banks deposit their money with the central bank at a rate set by the latter.
The bank rate, which is another major tool of the central bank, was cut after 17 years as part of the expansionary monetary policy. The BB, on the whole, uses the rate while giving out money to banks under its refinance scheme.
And the central bank has decided to continue its expansionary monetary policy for the second half of the fiscal year after reviewing the global and domestic economic situation amid the pandemic.