Banks cannot raise interest after approving loan: BB

Banks cannot charge more than 9 percent interest on any loan under the single-digit interest rate guideline effective from April 1.

Earlier a Bangladesh Bank instruction – issued in May 2018 – said banks could raise interest rate after approving a loan, following certain conditions. The instruction created confusion.

However, on Monday the Bangladesh Bank issued a circular stating to scrap the instruction that allowed the banks to raise the interest rate.

Now the banks will have to lend at a maximum 9 percent interest and the rate cannot be raised within the loan tenure, a Bangladesh Bank official told The Business Standard.

The government could impose the single-digit interest rate following long bargaining with the bank directors and executives.

Namely, Prime Minister Sheikh Hasina wanted to implement the single-digit rate to lower the interest burden on the industrial sector.

Former finance minister Abul Maal Abdul Muhith started negotiations for the implementation of the rate. 

And he instructed to ensure equal distribution of government deposit to the private and state-owned banks to enable the private ones to have more low-cost deposits. 

Also, banks enjoyed cash reserve requirement (CRR) cut several times which allowed them to get more liquid money from the central bank that they kept as a requirement to protect depositors' interest.

Finally, Finance Minister AHM Mustafa Kamal could implement the single-digit interest in April this year but the Covid-19 pandemic made the industrialists reluctant to take loans to expand their businesses.

So, the private sector loan growth was comparatively low in April, May and June this year. 

However, in July the growth curve moved upward, increasing to 9.20 percent (year on year) from 8.61 percent in June this year.