After the failure of all efforts, Bangladesh Bank is now set to force commercial banks - both private and public ones - to comply with the government’s instruction to keep interest rate at 9 percent on lending and 6 percent on deposit.
The central bank will issue a circular in this regard soon.
The decision came at a meeting of Finance Minister AHM Mustafa Kamal with private bank chairmen and managing directors at the BB headquarters in Dhaka. BB Governor Fazle Kabir was also present at the meeting.
“Bangladesh Bank will issue a circular soon, setting the interest rate at 9 percent for lending and 6 percent for deposit,” the minister told journalists after the meeting.“Banks must bring down the lending rate to single digit.”
He also touched upon the issue of non-performing loans (NPLs), saying banks will have to compromise on interest rate to bring down the amount of bad loans.
The minister said banks will get deposits as the government will not buy savings instruments much.
He said the government will provide the banks with policy support to help them bring down the interest rate.
To implement the prescribed interest rates, private banks will have to change business patterns to reduce their operating costs, he said.
The minister said of the total 57 commercial banks in the country, currently, 16, including seven state-owned ones, are charging single digit interest rate on lending.
Most of the private commercial banks are charging 11 to 12 percent interest on lending when giving 10plus percent interest on deposit.
However, experts opposed the fixing of interest rates, saying it is contradictory to the existing system.
“This is totally contradictory to the existing banking system. if the central bank fixes the interest rate by issuing a circular, it will take the banking system back to the 1970s or 1980s,” said Ahsan H Mansur, executive director of the Policy Research Institute (PRI), a think-tank.
“The sudden change in the lending rate will benefit only the influential people and deprive the less fortunate. The circular will open up the door for further looting of money. At the same time, deposit will collapse because depositors will go to the savings certificate,” he added.
Meanwhile, Syed Mahbubur Rahman, president of the Association of Bankers, Bangladesh (ABB) said: “The fixing of interest rate will deteriorate current liquidity crisis further. Though, it will be difficult but banks will be compelled to implement if circular is issued fixing the interest rate.”
Earlier in June last year, Bangladesh Association of Banks (BAB), a platform of private banks' directors, decided to bring down interest rate on deposits at 6 percent and the lending rate at 9 percent from July 1.
The move came weeks after the government cut cash reserve ratio one percentage point to 5.5 percent against the promise of bank sponsors that they will bring down interest rate at a single digit.
Since then, Bangladesh Bank and government repeatedly instructed banks to implement their promise but most of the banks did not do it amid ongoing liquidity crisis in the banking system.
In the budget for current fiscal year, government expressed its firm determination to bring down interest rate at single digit as part of its effort to reform the banking sector.
“Banks assured that we will see a turn around in the banking sector from September. Banks will reduce NPLs and interest rate by September through cutting operational cost,” said Finance Minister Mustafa Kamal.
“Our Economy expanded suddenly but banking sector did not get its institutional shape to support the economy. It is because we could not nourish the banks. We will review the health of the banks to identify their problems,” he further said.
Discussing Basic Bank, the minister said: “BASIC Bank is also a problematic issue, as we could not revive it. The government will, however, continue to support the bank. We need time to resolve the problems plaguing the bank. But first, we must achieve structural strength.
“There will be no more chances of looting money.”