The weighted average real lending rate in Bangladesh is the lowest among Southeast Asian peer economies as the government has imposed lending rate cap at 9 percent from April 1.
The real lending rate of Bangladesh came down to 1.9 percent while it is 3.6 percent in India and 1.3 percent in Vietnam, according to data from the Bangladesh Bank.
The Bangladesh Bank in its latest monetary policy for the current fiscal year said both lending and deposit interest rates are seen to be following declining trends, particularly towards the end of FY20.
The gap between lending and deposit interest rates – viewed as a measure of intermediation efficiency of banks – has also been significantly narrowed down since April 2020 this year, mainly because of the central bank's policy direction for rationalisation of interest rates/profits on banks' lending and investment.
The cross-country evidence suggests that the weighted average real lending rate remained lower in Bangladesh than in some of its regional neighbours, including India, said the report.
Feedbacks from selected economists, policymakers, and stakeholders have raised some concerns over the issues developed recently in the financial sector of Bangladesh, according to policy statement.
They argued that the Bangladesh Bank's policy direction for rationalising interest rates/profits by executing 9 percent lending rate cap might seriously hamper the growth of small and medium-sized enterprises whose monitoring and management costs are relatively higher in nature.
The impact of lowest return from lending has already been reflected in the market as banks are reluctant to lend to the private sector, causing a significant fall in the private sector credit growth to 8.6 percent in the last fiscal year.
The banks' reluctance in lending to the private sector caused excess liquidity to pile up.
During the fiscal year 2019-20, monthly average surplus liquidity stood at Tk1034.9 billion.
The growth in private sector credit experienced a moderating trend throughout the whole year (FY20) initially due to the banks' adherence towards quality lending which was further aggravated by the outbreak of coronavirus, said the monetary statement.
Nonetheless, Bangladesh's private sector credit growth is still higher than in many other fast-growing South Asian and East Asian emerging markets and developing economies including India, Sri Lanka and Indonesia, according to the monetary statement.