Management at most of the banks in Bangladesh are in dilemma about how to implement the bank owners’ decision to cut lending rate to single digit (9 per cent) keeping the deposit rate at 6 per cent as they fear the hurriedly taken move would put the financial health of the embattled banks at further disarray.
As per the announcement made by the bank owners, 9 per cent lending rate for the productive sector was supposed to be implemented from July 1 but banks are yet to implement the rate as they are busy calculating its impact.
Experts said that although there was no debate that the single digit lending rate, which could be achieved in the natural course, would help boost the country’s economy, forceful implementation of such rate would hardly bring any positive results instead it might weaken financial health of the banks especially of the new ones.
They also said that the banks directors (about 700 individuals in 57 banks) who took one-seventh of loans that these banks disbursed (Tk 8,92,403 crore) at the end of May this year, have no legal rights to impose such decision on the banks’ management.
Huge amount of classified loans in the banking sector, which increased to Tk 88,589 crore at the end of March 2018 and a major cost of fund for the banks, would be another barrier to reducing lending rate, they said.
A chief executive officer of a private commercial bank told New Age that the decision to cut down the lending rate to 9 per cent in a hurried manner would ultimately benefit the bank directors, who are businesspeople, while the banks’ financial health would deteriorate further.
According to the central bank data, 15 banks borrowed term deposits for different periods from their clients with the interest rate ranging from 8 per cent to 11 per cent rate.
The deposits were taken for three months, six months, nine months, one year and beyond one year meaning that the banks will have to return the amounts after the end of the specific periods.
The banks are: AB Bank, Exim Bank, First Security Islami Bank, IFIC Bank, Meghna Bank, Modhumoti Bank, Mutual Trust Bank, National Bank, NRB Commercial Bank, NBR Global Bank, One Bank, Premier Bank, South Bangla Agricultural Bank, Social Islami Bank and Southeast Bank.
For instance, if a bank collects deposit from its clients for three months at the rate of 10-10.50 per cent, the payment to depositors is not only the cost. The bank has to spend additional 2.5-3.5 per cent for cash reserve ratio, general provisioning and administrative expenditure and special provisioning, bankers said.
Again, if a client borrows fund from the bank at the rate of 10 per cent, the bank will have to add another 2.5 per cent to 3.5 per cent as cost of fund meaning that the break even lending for the entity would not be less than 13 per cent, depending on capacity of the banks.
If the entity lends below the cost of fund (at 9 per cent), the rest amount, the gap between the cost of fund and lending, would be loss
for the bank from its capital or other income, meaning that the bank’s financial health would weaken if the entity continues such borrowing.
Apart from the term deposits, banks collect lower rate fund through savings accounts, current accounts and special notice deposit.
Asked about the decision on setting lending rate at 9 per cent and deposit rate at 6 per cent by the bank owners, and its possible impact on the banking sector, former Bangladesh Bank governor Salehuddin Ahmed told New Age, ‘I don’t know how the decision would be implemented by the banks as the lending and deposit rates in the banks are driven by the market.’
It would be difficult for the banks to implement such decision and the sector could not run under such situation, he said.
‘Deposits in the banks would decline if deposit rate is brought down to 6 per cent or below as people, especially the marginal people, would search for alternative options and some letterhead entities would take advantage of it,’ Salehuddin said.
‘It’s a political game, rather than giving advantage to the economy and the bank owners were influenced to do it although they don’t have any jurisdiction to impose the decision as they are not any regulatory body. Even the central bank cannot do it,’ he said.
The rate cut could ultimately create another problem in the banking sector as there are risks of deterioration of the financial condition of the banks, said the former BB governor, adding that some banks might incur losses while some others might discontinue loan disbursement to avoid losses, which would ultimately cause stagnant economic state in the country.
Former interim administration adviser Mirza Azizul Islam told New Age, ‘It’s very early to predict but the banks might impose additional service and processing charges on the customers along with 9 per cent interest for the implementation of the rate.’
He also thinks that the banks’ profit margin might decline a bit due to the implementation of the rate as the entities have additional sources of low cost
funds, apart from fixed deposits, to adjust the cost of fund.
Top executives of a number of banks told New Age that they were in fear of losses as loan disbursement at 9 per cent would be a loss for them considering high rate of borrowing from their customers.
They also said that influential quarters would ultimately take advantage of the decision, which was taken by the bank owners under the platform of Bangladesh Association of Banks.