Govt borrows from banks at above 9pc, belies its rate stance

HM Murtuza | Published: 00:00, Jan 19,2020

 
 

A file photo shows the Agrani Bank head office at Motijheel in the capital. The government is borrowing funds from banks at more than 9 per cent interest rates against treasury bills and bonds, which contradicts its move to force banks to implement 9 per cent lending rate. — New Age photo

The government is borrowing funds from banks at more than 9 per cent interest rates against treasury bills and bonds, which contradicts its move to force banks to implement 9 per cent lending rate.

As per rules, lending to the government or even against any government guarantee does not create any financial vulnerability to banks as it is considered risk-free, said Bangladesh Bank officials.

The central bank does not include any amount of lending to the government in banks’ risk weighted assets, meaning that the banks are exempted from keeping any capital against such borrowing.

But, banks’ lending to the private sectors is considered risky as there are always risks of defaulting, the officials said.

The scarcity of funds in the country’s banking sector, caused by lower deposit growth and high non-performing loans, has forced the government to borrow funds from the banks at above 9 per cent interest rate against long-term securities, taking the market situation into consideration, said bankers.

Even a year ago, the government had borrowed funds at less than 5 per cent interest rate when the fund flow in the banking sector was a bit better and the government’s bank borrowing was less, reflecting the dominance of demand and supply situation in determining the lending and deposit rates, they said.

As per the BB data, the government in December last year borrowed Tk 4,002.51 crore from the country’s banks including the central bank at above 9 per cent interest rates against 10-year, 15-year and 20-year treasury bills and bonds.

Of the amount borrowed, the central bank, which was then working on issuing an instruction to banks to implement 9 per cent lending rate, provided Tk 1,255.09 crore in December.

The rest Tk 2,747.42 crore was provided by the commercial banks.

The government borrowed against 20-year treasury bonds at the rate of 9.43 per cent, 15-year treasury bonds at the rate of 9.33 per cent and 10-year treasury bonds at the rate of 9.23 per cent.

Besides, banks issued Tk 2,000 crore in credit to the government against five-year treasury bonds at the rate of 8.97 per cent in last month.

The government, however, is borrowing money from banks for short term, ranging from 91 days to two years, at the rates between 6.69 per cent and 8.33 per cent interest rates.

‘How would it be possible for the private sector to get loans at 9 per cent interest rate when the government itself is borrowing at above 9 per cent interest?’ questioned former adviser to an interim government AB Mirza Azizul Islam.

Despite the changed situation and repeated attempts for forceful implementation of the single-digit lending rates, finance minister AHM Mustafa Kamal on December 30, a day before the deadline for implementing 9 per cent lending rate for the industrial sector, deferred the deadline by three months, setting April 1 this year as a fresh deadline.

The minister, however, said that the highest 9 per cent interest rate for lending would be implemented for all loan products except credit card.

Mirza Aziz, however, told New Age last week, ‘I doubt whether the implementation of single-digit lending and deposit rates would be possible or not.’

If implemented, the spread would be only 3 per cent, he said, adding, ‘We have never seen the country’s banks operating with 3 per cent spread.’

If lending at 9 per cent is made mandatory, the banks would have to receive deposits at 4.5 per cent, he said.

‘If deposits rates fall below the inflation rate, depositors would not feel encouraged to keep money with banks. Then, how the banks would get funds and lend to the industries?’

Mirza Aziz said, ‘I found the move to implement 9 per cent lending and 6 per cent deposit rates impractical.’

On August 2, 2018, the then finance minister, AMA Muhith, first announced that the single-digit lending and deposit rates would come into effect on August 9 of the same year.

The government has fulfilled a host of demands made by the banks to facilitate the interest rate implementation, but the rates have remained unimplemented as the Bangladesh Association of Banks delayed the implementation on various pretexts.

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