Bankers and experts have objected to the forceful implementation of the single-digit lending rate, leaving untouched the loan defaulters who have made the major damage to the country’s banking sector.
Such implementation may also lead the banking sector to a burst and slow down the credit flow to the private sector, hindering economic expansion, they said.
The observations came following the issuance of a Bangladesh Bank circular on Monday that set the ceiling on lending rate on all loan products, except credit cards, of the banks at 9 per cent.
In the circular, banks have been asked to implement the rate from April 1 this year.
Along with the fresh loans, banks will have to bring down the lending rates of all the existing loans and advances within 9 per cent from April 1 this year, an official of the central bank said.
Policy Research Institute executive director and BRAC Bank chairman Ahsan H Mansur told New Age that the government’s move would harm the banking sector first and gradually the economy.
Due to lower rate of interest, the money from the banks would flow to the informal sectors which are comparatively risky and a portion of the fund would flow out of the country, Mansur said, adding that the drain-out of money would ultimately weaken the banking sector.
On the other hand, issuing credit to the corporate at the rate of 9 per cent might be viable for the banks, he said. However, lending at the single-digit interest rate to the small and medium enterprises would not be viable for the banks due to high operating cost to reach the SMEs, he said, adding that the banks would be reluctant to issue credit to the SMEs.
Against the backdrop of deteriorating profitability of the banks, the BB’s move would be fresh a blow to the banking sector.
According to a recently published BB report, as of the September-end quarter of last year, returns on equity of the scheduled banks turned 1.9 per cent negative, which were 3.6 per cent positive three months ago.
Besides, returns on asset of the banking sector dropped to 0.1 per cent at the September-end quarter from 0.2 per cent at the June-end quarter, the BB report said.
Due to the low margin of profit, banks would be more interested to issue loans to the corporate or big clients instead of the SMEs, said Ahsan.
‘Is it the intention of the government behind the move?’ he questioned.
If the SMEs were deprived of the bank loans, they would be forced to borrow money at even up to 100 per cent interest from the informal sector, he said.
‘Though 9 per cent lending rate would be supportive for the economic expansion, the forceful implementation of the rate may lead the banking sector to a grave situation,’ former Bangladesh Institute of Bank Management director general Toufic Ahmad Choudhury told New Age on Tuesday.
In any means, the forceful implementation of the lending rate in the banks is not possible to attain once the inflation and cost of fund of the banks are taken into consideration, the economist said.
Under the given 6 per cent deposit rate and 9 per cent lending rate, the banks would get only 3 per cent margin that might be enough to meet operating cost and to attain tiny profit margin by banks, Toufic said.
‘But, how will the cost of defaulted loans be adjusted as the banks, especially the older ones, are suffering with around 11 per cent to 12 per cent defaulted loans?’ he questioned.
Instead of taking serious measures to contain the defaulted loans, the government has been issuing incentives to the defaulters, he said.
On the other hand, the banks would be bound to bring down the deposit rate to 6 per cent and the rate would be lower for current accounts, which would discourage depositors from keeping money in banks, he said, adding that the lower fund flow might deepen liquidity crisis in the banking sector.
These altogether might result in a burst in the banking sector and such a grave situation in turn would impact adversely on credit flow to the private sector and subsequently to the economy, Toufic said.
On Monday, former Bangladesh Bank governor Salehuddin Ahmed told New Age that setting the lending rate would hardly bring any positive results for the banks, customers as well as for the economy.
Dubbing the move a wrong policy, the economist cautioned that the country’s economy might be impacted adversely due to the move.
‘I do not understand, in what consideration such a move is taken when all other factors of the economy are market-oriented,’ the former BB governor said.
Depositors would be reluctant to keep money in banks while banks would be reluctant to issue credit, which would result in a credit growth fall and subsequent negative impact on the economy, he said.
The BB could have reduced the interest rate spread, he added.
Want stories like this in your inbox?
Sign up to exclusive daily email
More Stories from Banking