Lending rate in several banks for the industrial sector has been increasing gradually, topping 16 per cent in some cases, amid growing liquidity crisis in the country’s banking sector.
Country’s businesses fear that the rising rate would hit trade and investment hard.
Interest rate in several banks has increased to 1-3 percentage points while some of the banks are charging up to 16 per cent interest on the businesses, according to the latest Bangladesh Bank data.
Mutual Trust Bank managing director and chief executive officer Anis A Khan told New Age, ‘Banks are suffering from a severe liquidity crisis ahead of the adjustment of advance deposit ratio by September 30 this year to comply with the regulatory instruction.’
‘As deposits have become very much scarce, banks are competing with each other to collect deposits and offering high rate of interest against deposits,’ he said.
In December last year, banks’ weighted average rate of deposits was 5.26 per cent that increased to 5.34 per cent in January this year.
If high return on national savings certificates is considered a reason for the fund scarcity, reducing the interest rate on NSCs could help improve diversion of funds to the banking sector, Anis said.
‘Banks have been requesting the government to reduce the rate for long,’ he said, adding that they had made the same request to the prime minister at a recent meeting.
The businesses said that the rising interest rate would affect their competitiveness in international trade and investment.
The move of the banks to hike lending rate was also contradictory with the government’s plan to improve the country’s ranking in the ease of doing business index.
Besides, the banks’ move to increase lending rate was also inverse to the prime minister Sheikh Hasina’s stance to bring down the interest rate of bank loans to single digit.
On March 31 this year, Sheikh Hasina, for the last instance, said that the government would take measures again to reduce the interest rate for the sake of the country’s industrialisation.
‘We’ll sit again to discuss how to reduce the interest rate on bank loans,’ she said.
Bankers said that high sales of national savings certificates due to their high rates of yield also squeezed the banks’ scope for getting fund at lower prices and people would not put their fund where they would get low interest.
Interest rate on working capital for small industries at Standard Bank increased to 11-14 per cent in March this year, which was 9 per cent in November last year.
Interest rate for working capital financing at Eastern Bank increased to 12-15 per cent in March this year from 11.5-14.5 per cent in November last year.
Modhumoti Bank charged 13-16 per cent interest on small industries for working capital financing while the rate was 14.5 per cent at Meghna Bank.
‘As a result of an increase in lending rate, investments would stall,’ Bangladesh Garment Manufacturers and Exporters Association president Siddiqur Rahman told New Age.
It would also increase non-performing loans in the banking sector as business with such a high lending rate would not be viable, said the president of the trade body of readymade garment industry that constitutes 83 per cent of the country’s total export earnings.
Bangladesh Bank officials said that the liquidity crisis in the banks had been intensifying amid slow growth in deposits.
BB data showed that the deposit growth in the country’s banking sector was 9.79 per cent in January this year and it has remained below 10 per cent since July last year, prompting banks to go for collection of deposits at high rate. Some of the banks are even offering more than 10 per cent to collect deposits.
Banks in recent times have increased borrowing money from the central bank to cope with the shortage while inter-bank loan transactions have also risen, they said.
Banks borrowed around Tk 42,000 crore from the central bank through repurchase agreement (REPO) in the period between July, 2018 and till April 9, 2019 while the entities borrowed only Tk 572.86 crore in the entire 2017-2018 fiscal year.
In the fiscal year of 2016-2017, banks’ borrowing though REPO was Tk 115.67 crore.
Apart from these, non-performing loans in the country’s banking system is another factor, which has created additional pressure on the system.
In 2018, the amount of defaulted loans in the country’s banking system shot up by 26.39 per cent or Tk 19,608.4 crore to Tk 93,911.4 crore from Tk 74,303 crore a year ago.
The government’s direct borrowing from the banking sector increased by 23.81 per cent to Tk 92,946 crore at the end of February this year from Tk 75,069 crore in February last year that also put additional pressure on the banking system.
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