Single digit lending rates: Still a pipe dream

In April last year, then finance minister AMA Muhith sat with the bank owners to meet their demand for making way for more funds available with banks. In return, they promised to lower their lending rates to a single digit.

It did not materialise, as everyone with an understanding of economics predicted.

As the promise remains unfulfilled, some 16 months later, the new finance minister, AHM Mostafa Kamal sat with the Bangladesh Bank and later said the central bank will issue a circular forcing the banks to lower their lending rates.

Pessimism still prevails over the new initiative. Why?

Because low lending rate is not a factor of forced directive, it is the interplay of the market forces, health of the banks, the underlying corruption and a lack of regulatory oversight that make the banks’ bottom lines weak, leading to higher interest rates.

If one follows the simple market logic, when demand for private credit is the lowest in the past five years, lending rates should have been depressed. That is not. Why?

That brings one to the overall picture of public financing. The growth in public credit is too high at 21 percent, lower offtake of private credit will have little impact on the banks’ liquidity situation.

And to add to the structural weakness, the non-performing loans or NPLs as they are dubbed are still high despite huge rescheduling, write-off and a relaxing of classification rules.

This is how bankers and economists explain why the new initiative is likely to have little impact on the market and, as some of them say, it would rather push the banks to deeper crisis and a backward walking towards the regulated banking regime that the country had shaken off to be more market focused since 1989.

Bangladesh Bank came out of the fixed interest rate system as part of its financial market reform in line with international standards.

The aim of open market interest rates was to create competitions in the market so that difference can be made between efficient and non-efficient banks.  

In 2019, the government moved to reform the financial market by returning back to the administered interest rate system through forcing the central bank to issue a circular in this regard.

In the current budget, the government expressed its firm determination to bring down the interest rates to single digit as part of its effort to reform the banking sector. 

The finance minister on Sunday announced that the central bank will issue a circular, fixing interest rates at 9 percent for lending and 6 percent for deposits.

Earlier in April last year, then finance minister AMA Muhith forced the central bank to cut cash reserve ratio (CRR) by one percentage point to 5.5 percent. The CRR reduction was on condition that banks would bring down their lending rate to single digit by July 1, 2018.

But banks did not keep their promise despite repeated warnings from the central bank and the government.

Finally, the current finance minister is now dictating the central bank to issue a circular, forcing banks to implement their promised single digit interest rates, which economists fear will deteriorate the situation.

“The controlled interest rates will erode deposits in the banking system squeezing their capacity to lend,” said Mirza Azizul Islam, former adviser to a caretaker government.

He said the growth of banking sector will fall due to the low lending capacity.

The economist said the NPLs are the main reason for the high lending rate. “If the government takes step to recover the bad loans, then the lending rate will automatically go down.”  

It is impossible for banks to implement the prescribed rates because people will not be interested to put their money with banks at 6 percent rate when the government is giving above 11 percent interest on savings instruments, said a top executive of a private bank.

If banks are forced to reduce interest rates, it will deteriorate the ongoing liquidity crisis, he further said preferring to be anonymous. 

Currently, banks struggling to get deposits even offering 10 plus interest rate, he said.
The deposit growth remained between 9 and 10 percent over the last one year, central bank data shows.

The finance minister, meanwhile, assured banks that the government will not buy savings instruments much to keep money flow to the banks.