Following the Bangladesh Bank's decision to remove the lending rate cap in June this year, interest rates for agriculture and rural loans have soared to around 10%, raising concerns among experts that this could further affect the already inflated market and drive up prices of agricultural products, including rice, poultry, and cattle.
The Bangladesh Krishi Bank, the largest lender in the agricultural sector, raised interest rates on agricultural and rural loans to 9.93% this November.
Sonali, Janata, Agrani, and Rupali banks have followed suit, setting their interest rates at the same level. Rajshahi Krishi Unnayan Bank, which initially set its rate at 9.10% last month, is now considering further increase.
Similarly, private banks are also offering similar interest rates for agricultural loans, approaching 10%. The interest rate on such loans distributed through NGOs by banks even exceeds 10%.
Interest rates on agricultural and rural loans remained below 8% until June this year.
Former director general of the Bangladesh Institute of Development Studies (BIDS) MK Mujeri said the rise in interest rates for agricultural loans will lead to increased production costs, potentially hindering cultivation and diminishing overall output.
Farmers say the higher interest rates on agricultural loans will necessitate an increase in product prices to cover the additional costs, otherwise they will face losses.
Md Nasiruzzaman, chairman of the Bangladesh Krishi Bank, told The Business Standard that the removal of the lending rate cap by the central bank has forced an increase in deposit interest rates.
"Consequently, the interest rate for agricultural loans has also been raised. However, this adjustment has been implemented in accordance with the formula prescribed by the Bangladesh Bank," he said.
Agri products prices to go up
Stakeholders say the recent fertiliser price hike implemented by the government, coupled with increases in labour wages and pesticide prices, have posed a significant challenge for farmers. The interest rate hike in agriculture and rural loans will further worsen the situation.
The Boro season, spanning the period December to April, is the predominant rice crop, accounting for over 55% of the country's annual rice production, yielding over 2 crore tonnes of rice annually. The season plays a pivotal role in ensuring the country's year-round food security.
The price of rice has been on an upward trajectory in recent months. According to data from the Trading Corporation of Bangladesh (TCB) on November 16, the price of coarse rice increased by 4.08% in a single month. However, consumers say the price hike is even steeper, with some varieties experiencing an increase of Tk5 to Tk6 per kg.
Agricultural and rural loans encompass loans disbursed to the fisheries and livestock sectors as well. This means that the interest rate increase applies to loans for fish, chicken, egg, and cattle rearing, potentially raising the production costs of fish, meat, and eggs.
The market for these products has been experiencing volatility over the past year, and the impending increase in production costs due to higher loan interest rates could further destabilise the market.
Forkan Molla, a farmer from Mollahat upazila, Bagerhat, said agricultural loans provided by Krishi Bank require full repayment with interest within six to nine months.
"An increase in the interest rate would necessitate additional payments, potentially forcing farmers to raise product prices or face financial losses," he said.
Miraj Sheikh, another farmer from the same upazila, shared that he had taken a loan for fish farming, with repayments spread across two to three instalments per year. He expressed concern that an increase in loan interest would further elevate the production cost of fish.
The manager of a branch of Rajshahi Krishi Unnayan Bank in Dinajpur, speaking on condition of anonymity, said farmers always prefer low-interest loans. He added that farmers would be disheartened to some extent if forced to take loans at higher interest rates.
Impact of lifting lending rate cap
In June this year, the Bangladesh Bank lifted the loan interest rate cap, prompting the introduction of new rules for determining interest rates. Under these new rules, banks can set their lending rates based on the average interest rate on 182-day Treasury Bills over the past six months, plus a margin. The Bangladesh Bank publishes this Six-Month Moving Average Rate (SMART) in the first week of every month.
Initially, the Bangladesh Bank stipulated that banks should determine loan interest rates by adding a margin of 3% to SMART, with an additional 2% margin for agricultural loans. However, in a subsequent circular issued last October, the Bangladesh Bank revised the margins to 3.5% for commercial loans and 2.5% for agricultural loans.
The SMART rate reported by the Bangladesh Bank for November is 7.43%. This increase reflects the rising interest rates on treasury bills, driven by increased government borrowing. In response to this trend, Krishi Bank and Janata Bank have set the highest interest rate by adding 2.5% to the SMART rate.
As a result, Bangladesh Krishi Bank has implemented three interest rate hikes since July. In October, the rate stood at 9.70%, up from 9.10% at the start of the fiscal year in July.
However, M K Mujeri, former director general of the Bangladesh Institute of Development Studies (BIDS), said the recent interest rate hikes following the lifting of the ceiling are not solely driven by demand factors but also stem from various internal weaknesses within the banking sector.
"Mismanagement, irregularities, and a high prevalence of default loans have plagued many banks, leading to inflated operating costs. In an attempt to recoup these unnecessary expenses, banks are resorting to raising loan interest rates, effectively shifting the burden of their inefficiencies onto their customers," he said.
Agri loan disbursement
The Bangladesh Bank has set a target of Tk35,000 crore for credit disbursement in agriculture and rural loans for the current fiscal year. Out of this, Krishi Bank has been assigned a disbursement target of Tk68,00 crore.
In the current fiscal year, Rajshahi Krishi Unnayan Bank has been tasked with disbursing Tk1,950 crore in loans. Additionally, Sonali, Janata, Agrani, and Rupali banks will collectively disburse Tk3,280 crore. The remaining loans will be distributed by private and foreign banks under their own management and through NGO partnerships.
In the previous financial year, the country's banks disbursed agricultural and rural loans to the tune of Tk32,830 crore among more than 36 lakh farmers.
To promote the cultivation of import-substitute crops, banks are also disbursing loans with government interest subsidies. The Bangladesh Bank further incentivises financing in the agricultural sector through a refinancing fund. These loans carry an interest rate of 4% to 5% for farmers, enabling the cultivation of potatoes, wheat, ginger, oilseeds, dal, onions, garlic, maize, and salt.