Most NBFIs increase interest rates on deposits amid high inflation
NBFI sources said they received verbal consent from Bangladesh Bank officials for increasing the deposit rates above the rate of 7% set by the central bank on deposits and 11% on loans
Most non-bank financial institutions, widely known as NBFIs, have increased interest rates on deposits amid soaring inflation and liquidity crisis.
NBFI sources said they received verbal consent from Bangladesh Bank officials for increasing the deposit rates above the rate of 7% set by the central bank on deposits and 11% on loans. The cap came into effect in July this year.
Several office-bearers of the financial institutions' body, Bangladesh Leasing and Finance Companies Association, told The Business Standard that as the current inflation hovers over 9%, deposit collection at 7% interest has become tough.
Amid such a situation, the delegation of the association led by its Chairman Mominul Islam last month met Bangladesh Bank Governor Abdur Rouf Talukdar and demanded the withdrawal of interest rate caps, especially on deposits.
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Later, the central bank gave verbal consent to the association to increase the interest rates on deposits, but not more than 8%, office-bearers said.
The NBFIs, however, had already been offering rates higher than 8%.
Experts are very positive about non-bank financial institutions' move for increasing deposit rates.
"NBFIs have very limited opportunities to collect regular deposits compared to banks. So, NBFIs need to be kept in a comparatively relaxed position. The central bank's decision [to allow increasing deposit rates] is rational from that perspective," Salehuddin Ahmed, former Bangladesh Bank governor, told TBS.
"I don't see any rationality behind the central bank-set interest rate caps. The caps seem to have no fruit," he added.
He suggested that the Bangladesh Bank take NBFIs under special consideration for SME refinancing schemes so that they can grow further.
The former governor also urged NBFIs to come up with more innovative products.
Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, told TBS that the government should withdraw interest rate caps. "It's needed now. Overall, the policy [keeping rate caps] was wrong. It, even, is not operable now," he added.
"As the central bank cannot withdraw the caps officially, it goes for such an unofficial approach [verbal consent]. However, the financial system should not be run by unofficial signals."
"We must have straightforward rules," said Ahsan H Mansur.
According to the August data of the Central Bank, out of 29 non-bank financial institutions operating in the country, only 5 institutions – DBH Finance, IDLC Finance, Union Capital, National Housing Finance and Investments, Lankan Alliance Finance Limited and IPDC Finance – kept the interest rate below 7% in deposit collection following the official cap, while the remaining 24 crossed the cap rate.
Thirteen institutions paid over 8% interest on deposits. Of them, Uttara Finance and Investments offered the highest 9.60%.
The data of September is yet to be released.
However, most of the NBFIs offering higher deposit rates were not in good financial condition. There are at least 9 institutions which offered higher interests on deposits than that on loans. As a result, their interest income went negative.
Besides, Aviva Finance, International Leasing and Financial Services, Islamic Finance and Investment and CVC Finance lent at over 11%.
When contacted, Bangladesh Bank Spokesperson GM Abul Kalam Azad told TBS that the interest rate caps of 7% and 11% are still effective for NBFIs.
"If anyone violates this, it would be a break of the rule."
