A smart economy with inclusive growth is the precondition for implementation of the initiative of “Smart Bangladesh” and a pro-active banking sector will be one of the cornerstones of that economy.
Bangladesh Bank has picked SMART (Six-Month Moving Average Rate of Treasury Bill) as a basis for the lending rate of the banking sector with the aim of making this sector 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 and adopt this.
SMART is being used for setting up the final lending rate of banks from July 2023. However, the whole banking sector of Bangladesh is going through a challenge with the imposition of SMART on lending rates. 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 - the majority of which come from public deposits.
Borrowing funds for depositors became quite difficult as the rate of inflation was already around 10%. Reducing inflation to 6% within FY 2023-24 seems next to impossible at this point. On the contrary, BB has also increased the repo rate gradually to address the rising inflation.
It is observed from the table that SMART varies over time; SMART was 7.1% at the very beginning of July 2023 and at 7.72% in December 2023.
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 funds. 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; 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 as it reflects the true cost of funds.
On the other hand, the interest rate cap resulted in lower returns, as low as 6% 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 expected to reduce lending costs, ensure the availability of credit, manage risk, and bring a positive impact on the Bangladesh economy.
Bithe Rani Aich is Research Associate, Bangladesh Institute of Governance and Management (BIGM).
