Experts on Thursday said that setting interest rates by the government in a free market economy like Bangladesh was a wrong decision and it would disrupt competitive business environment in the country’s banking sector.
They made the observation at a plenary session on macro banking environment of a two-day Annual Banking Conference-2018 that ended on Thursday.
Bangladesh Institute of Bank Management organised the conference at its premises in capital Dhaka.
Experts, however, said that the bank deposit rate should be above the rate of inflation with a view to encouraging savings through the formal channel, otherwise fund could divert to the unproductive sectors.
Bangladesh Bank general manager Md Habibur Rahman presented a paper on ‘Single Digit Interest Rate: Bangladesh Perspective’ at the plenary session.
The paper was prepared by Habibur in association with two deputy directors of central bank, Md Rezwanul Hoque and Md Nur-E-Alom Siddique.
In the paper, Habibur showed the lending rate in a bank could be set at lowest 6.2 depending on that the entity’s weighted average deposit rate was set at 2.5 per cent, operating cost at 2 per cent, returns on asset at 0.2 per cent, capital charge at 1 per cent and risk premium at 0.5 per cent.
On the other hand, lending rate in a bank could be highest 13 per cent in the existing situation if weighted average deposit rate was set at a high 5.6 per cent, operating cost at 2.7 per cent, return on asset at 2.2 per cent, capital charge at 1.5 per cent and risk premium 1 per cent.
Based on the hypothetical lending rate, Habibur in his paper also mentioned that the lending rates in the state-owned commercial banks would be 9.7 per cent, 11 per cent in the private commercial banks and 7.4 per cent in the foreign commercial banks.
The paper also observed that charging single digit interest rate on lending might not be possible for most of the banks unless significant improvement was achieved to mitigate operating cost, capital charge and risk premiums.
Replying to a question from Dhaka University business studies faculty dean Shibli Rubayat Ul Islam, who was the chairperson of the plenary session, the BB general manager said, ‘We are not suggesting that the interest rate should be set by the central bank as combinations of all the required tools might not be same in all banks.’
‘That’s why, setting interest rate in a free market economy is a wrong decision,’ Rubayat said after the GM’s answer.
BIBM supernumerary professor Md Yasin Ali said, ‘As things are not same for all the banks, setting interest rate would also hamper competition among the banks.’
Stressing the importance of reducing interest rate, Centre for Policy Dialogue research director Khondakar Golam Moazzem said that there was huge scope for reducing lending rate just by reducing the interest rate spread that had remained high in Bangladesh.
In many countries, the interest rate spread is set at 3 per cent and they are doing well with the rate, he said.
Replying to a question whether the interest rate on deposit should be higher than the rate of inflation, the CPD research director said that the rate should be higher than the rate of inflation to encourage savings.
Speaking about the good repayment of loans by the small and medium enterprises and high interest rate on the sector, BIBM supernumerary professor Helal Ahmed Chowdhury said it indicated that the banks were charging high their good customers and the industrial sector was getting fund at low cost but their (banks) non-performing loans were rising.
Commenting on the paper, BIBM professor Md Nehal Ahmed said, ‘Definitely we need single digit bank interest rate, but the way it is decided probably is not correct.’
Although the interest rate on deposit has already reduced to 6 per cent or below, interest rate on lending is still above 9 per cent mainly because of non-performing loans as bankers adjust the cost of NPLs with the deposit rate for setting lending rate, Nehal said.
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