High interest rate is responsible for the rising trend of default loans while high volume of such loans is the only obstacle to reducing the interest rate to a single digit, said Finance Minister AHM Mustafa Kamal yesterday.
He admitted that the surging default loans is the only area where the government could not play a strong role.
"If the interest rate goes down, the amount of non-performing loans will also come down," he said at a meeting with the chairmen and managing directors of all the banks.
The government yesterday formed a committee to find a way to bring down interest rates to single digits as private sector banks could not lower their lending rates even one year after they promised to do so.
The banks' promise came after the then finance minister AMA Muhith had given the banks some special facilities by reducing their compulsory reserve requirement. Each bank has to maintain a certain portion of their deposit with the central bank and if the requirement is slashed, the banks get more money to lend.
However, their promises came to naught because the banks are laden with default loans, leading to high cost of funds. This made their promise of lowering interest rates ever elusive.
One year following the banks' promise, Finance Minister AHM Mustafa Kamal met the chairmen and managing directors of all the banks yesterday and gave Bangladesh Bank Governor Fazle Kabir the responsibility to form the committee. The governor formed the committee on the very day.
The seven-member committee is headed by SM Moniruzzaman, deputy governor of Bangladesh Bank. Other members are the chairmen of Agrani Bank and Standard Bank, and the managing directors of Rupali Bank, Mutual Trust Bank, IFIC Bank, and NRB Bank.
The committee will submit a report by seven days, outlining ways as to how the single-digit interest rate can be implemented, the finance minister said, adding the reduced rate will be implemented from January 1, 2020.
Though the government is firm to bring down the interest rate, bankers said it will push the banking sector into a deeper crisis.
A forceful implementation of the single-digit lending rates can boomerang on the banking sector, said a top executive at a private bank.
Bankers in Sunday's meeting said they do not have fund to lend at lower rates, according to the meeting sources.
Pressurised to implement a single-digit lending rate, banks became reluctant to lend money, taking the private sector credit growth down to 10 percent in October, the lowest in recent history.
In April last year, then finance minister AMA Muhith in a meeting with bankers decided to slash the Cash Reserve Ratio (CRR) by 1 percentage point to 5.5 percent for the benefit of banks to cut their lending rates.
Later in June that year, the Association of Bankers, Bangladesh announced to bring down the lending rate to 9 percent and the deposit rate to 6 percent from July 1, 2018.
The decision is yet to be implemented even though more than one year has elapsed. During this period, the Bangladesh Bank kept reminding the banks to fulfil their commitment but most of the private banks are still lending at interest rates above 12 percent.
However, state-owned banks have already brought down their lending rates to single digit.
On August 4 this year, the finance minister held a meeting with the chairmen and managing directors of private banks at the Bangladesh Bank headquarters and instructed the central bank to issue a circular to implement the single-digit interest rate.
The Bangladesh Bank served a letter on private banks instead of issuing a circular, strictly asking them to implement it.
But the banks did not comply with the central bank's instructions on the pretext of liquidity crisis.
Earlier on January 10 this year, the finance minister said default loans would not increase anymore because the Bangladesh Association of Banks would take necessary measures to check the loans.
However, default loans ended up increasing by Tk22,377 crore from December last year to September this year.
"It is true that non-performing loans have increased but there is reason," said the finance minister yesterday.
He said default loans are on the rise only because of high lending rates.
Defaulters were offered a long-term loan rescheduling policy to cut NPLs which will help banks to clean balance sheet in next 10 years. But it could not be implemented due to a stay order from the court.
By this time, NPL increased as the good clients who were paying regularly have stopped their payment to avail advantage of the policy.
"Now the court order is in our favour and its impact will be reflected in NPLs by January," the finance minister said.
He also hoped that the amount of NPLs will come down by December once the rescheduling policy is implemented.
Ahsan H Mansur, executive director of Policy Research Institute (PRI), however said, "Administrative approach will never work in market solution."
"It will distort the market and some influential will take the opportunity to take the money at low cost," he argued.
The implementation of single-digit lending rate will deepen liquidity crisis as the state-banks have already fallen in fund crisis for lending money at single-digit interest rates, he explained.