BB issues directives on 9% lending from April

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BB issues directives on 9% lending from April

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The Bangladesh Bank building at Motijheel Mehedi Hasan/ Dhaka Tribune

February 24th, 2020

No instruction on 6% deposit; economists, bankers critical of capping rates

The Bangladesh Bank on Monday asked scheduled banks to charge highest 9% interest for all types of lending, barring credit cards, to help expand business and economy.

The dictated lending regime would be effective from April 1, said a BB circular.

Senior bankers and economists are critical of the BB decision, saying the dictated 9% loan will squeeze the loan growth in the economy.

The central bank, however, refrained from imposing the 6% deposit rates across the board, backtracking on its earlier decision taken last month in a meeting with stakeholders, including bankers, BB and the finance ministry.

“We are not going to ask banks to fix deposit rates. Let banks themselves fix the rate at their convenience,” an executive director of the BB, requesting anonymity, told Dhaka Tribune.

“We are concerned about lending rates as it has direct consequence on business, economy and employment generation.”

The BB in its circular said current high bank interest rate regime was weighing on the country’s small, medium and large industries badly.

“Due to high interest, cost of doing business is escalating and industries are losing their competitiveness,” reads the circular.

The grave situation, typically caused by the exorbitant bank interest, made many bank borrowers fail to repay the bank loans, added the circular.

According to the circular, the latest directives will not be applicable for classified loans.

A 2% additional interest could be charged by banks in case any borrowers enjoying the 9% interest became defaulters, added the circular.

It said the existing 7% rate on export-oriented sector would remain unchanged.

Warning the scheduled banks, the BB circular said banks could not lower their lending amount in the industrial sector including the manufacturing sub-sector under the small and medium enterprises after the implementation of the 9% rate.

In this regards, the average yearly lent amount in the specified sectors based on the last three years total lending would be the basis for calculating the yearly lending amount, clarified the circular.

On January 29, bankers came up with a decision after a meeting that they agreed to provide not more than 6% interest on bank deposits from February 1 but banks would not follow the 6% interest rate for deposit pension schemes (DPS).

Talking to Dhaka Tribune, Southeast Bank Managing Director Kamal Hossain said: “BB made a proper decision by not imposing the deposit rate. As a result, banks can collect deposit at their convenience.”

However, eminent economist Zahid Hussain differed with the BB’s directives on capping the interest rates.

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

Zahid Hussain suggested that the government and the central bank should 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.

“It is not implementable. Banks will not invest much, as they will be unable to implement the 9% lending rate after collecting deposits at higher rates,” Syed Mahbubur Rahman, former president, Association of Bankers, Bangladesh.

The non-performing loans (NPLs) rose by Tk420 crore in 2019 over last year, according to the central bank data.

On February 2, Association of Bankers, Bangladesh (ABB) President Ali Reza Iftekhar said that bringing interest rates on small loans down to single digit would be difficult, as the cost of lending in the sector was very high.

“The supervision costs for financing the small enterprises is very high compared to other sectors,” said Ali Reza Iftekhar.

He said most of the banks that lent to small enterprises would find the single digit interest rate difficult to apply, as they lent money mostly to NGOs (non-government organizations).

On December 30 last year, Finance Minister AHM Mustafa Kamal said that the lending rate would be as high as 9% and deposit rate maximum 6% with effect from April 1.

On January 20, the finance ministry instructed the autonomous, semi-autonomous and government companies to keep 50% of their surplus funds at 6% interest rate with private lenders and the remaining half of their deposits will go to state banks, which can offer no more than 6% interest to facilitate banks to charge 9% for loans from April 1.

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