Hiking deposit rate unfeasible for banks with lending cap in place

People may not benefit from the lifting of the deposit rate ceiling as the central bank is sticking with the 9% lending rate cap.

Banks may not hike the deposit rate as the cap on interest rate of loans remains.

The growth of deposits is much lower than that of credit. We now have to work to increase deposits. At the same time, work should be done to boost customers' confidence in the banking sector and inspire the expatriates to send remittances through legal channels.

Deposit interest rate floor has been removed. However, with the lending rate cap in place, it is not very feasible for banks to increase the deposit interest rate. Banks that are small in size and have low customer confidence are forced to pay high rates on deposits. 

In a developing country like ours, GDP growth has to be maintained and inflation has to be managed simultaneously. The central bank has tried to give importance to both these issues in the monetary policy. 

The new policy has not lifted the lending rate cap. On the other hand, a lot of money has been withdrawn from bank channels (deposited in central bank vaults), resulting in an automatic tightening of liquidity in the market. Again, the 3% interest rate hike on consumer loans is now official. However, the interest rate for loans in corporate, SME and other sectors has been kept at 9% as before. From this point of view, tighter liquidity is good for us.

I think the increase in repo rate now is a recognition of the higher rate in the market. There is now liquidity stress in the bank channel. It is a good move as it helps to control inflation. Central banks are trying to tighten liquidity.

Credit growth in our private sector has been below 14% in the first six months of the current fiscal. Of this again 3% has been created due to increase in foreign currency prices. So, 14% private sector growth in January-June monetary policy seems ambitious to me.

Banks are offering up to 8% interest on deposits. This is the main challenge as their margins have shrunk to negligible levels due to the high interest on deposits.

Many are questioning how the monetary policy will be implemented by keeping the interest rate cap. The central bank is trying to strengthen the banking sector by increasing the interest rate spread in refinance schemes in various sectors including SMEs.

However, it is difficult to make monetary policy effective by capping the lending rate.

Selim RF Hussain is the MD and CEO of Brac Bank and chairman of the Association of Bankers, Bangladesh (ABB)