Ferdaus Ara Begum :
The Bangladesh Bank issued a circular imposing a ceiling on interest rate for all schedule banks from April 01, 2020. Now the lending rate for all sectors will be 9 percent except credit cards and thus it is pertinent that the deposit rate will be 6 percent for all types of deposits. It is estimated that the new single digit interest rate will be a boost for the private sector growth by having more investment and thus creating new jobs which is crucial need at the moment for the country. Moreover, Borrowers will be extremely benefitted from this interest rate as it would gradually decrease their cost of doing business.
Bangladesh Bank issued the circular on February 24 regarding the single digit interest rate. It was mentioned in the circular that it is a proper and timely decision to impose single digit interest rate on all schedule banks. As high interest rate is the main impediment of establishing business friendly environment in Bangladesh, the new interest rate would play a vital role to create harmony in the business sectors. This circular did not mention anything about Non-Bank Financial Institutions (NBFIs) despite their significant contribution in total industrial loan disbursement.
One of the positive attributes of this new interest rate is it will reduce the size of loan installments. Therefore, the loan payment capacity of borrowers will be definitely improved. Scheduled banks will witness more profit with the decline of default loans over the time. Bangladesh Bank officials are going to enforce two percent penal interest rate at the case of loan default. This will definitely encourage borrowers to repay their installments properly.
On the other hand, there is another concern that the 6 percent deposit rate might discourage depositors to keep their money in banks as their saving would now generate lower returns than previous times. This kind of situation might lead to the decline of deposit funds. The single digit interest rate can create a vulnerable situation in the banking industry. Due to cut in the lending rate, there will be extra demand for loanable funds. However, depositors will not be interested to deposit their money in banks which will create a mismatch in supply and demand of funds. If this situation arises, this will trigger the liquidity crisis in banks. In this condition, banks might face the pressure of increasing the interest rate. Moreover, some banks will surely struggle to make any profit margin in this new interest rate.
Government has announced that it is going to keep 50% of their funds in private commercial banks as deposits. The deposits will be allocated to private banks on the basis of their paid-up capital. Therefore, it can be estimated that it would help private banks to mitigate their crisis of deposits.
It will be a great challenge for Government to implement the decision of single digit interest rate. At first, Government has to provide certain facilities to private banks to execute the decisions properly. It is also important to address that how a borrower would be declare eligible to obtain a loan in 9% interest rate. The borrowers will not be able to attain the exact benefit of new interest rate if there is scarcity of deposit funds. The policy makers have to be alert that the new single digit interest rate should not affect the financial health of banks. Government need to assess the impact of all the stakeholders before implementing the decision. Market should be the main determinant of interest rate thus real rate should be based on market demand and supply, ceiling could solve some immediate problem but it cannot be a long term solution.
The Bangladesh Bank issued a circular imposing a ceiling on interest rate for all schedule banks from April 01, 2020. Now the lending rate for all sectors will be 9 percent except credit cards and thus it is pertinent that the deposit rate will be 6 percent for all types of deposits. It is estimated that the new single digit interest rate will be a boost for the private sector growth by having more investment and thus creating new jobs which is crucial need at the moment for the country. Moreover, Borrowers will be extremely benefitted from this interest rate as it would gradually decrease their cost of doing business.
Bangladesh Bank issued the circular on February 24 regarding the single digit interest rate. It was mentioned in the circular that it is a proper and timely decision to impose single digit interest rate on all schedule banks. As high interest rate is the main impediment of establishing business friendly environment in Bangladesh, the new interest rate would play a vital role to create harmony in the business sectors. This circular did not mention anything about Non-Bank Financial Institutions (NBFIs) despite their significant contribution in total industrial loan disbursement.
One of the positive attributes of this new interest rate is it will reduce the size of loan installments. Therefore, the loan payment capacity of borrowers will be definitely improved. Scheduled banks will witness more profit with the decline of default loans over the time. Bangladesh Bank officials are going to enforce two percent penal interest rate at the case of loan default. This will definitely encourage borrowers to repay their installments properly.
On the other hand, there is another concern that the 6 percent deposit rate might discourage depositors to keep their money in banks as their saving would now generate lower returns than previous times. This kind of situation might lead to the decline of deposit funds. The single digit interest rate can create a vulnerable situation in the banking industry. Due to cut in the lending rate, there will be extra demand for loanable funds. However, depositors will not be interested to deposit their money in banks which will create a mismatch in supply and demand of funds. If this situation arises, this will trigger the liquidity crisis in banks. In this condition, banks might face the pressure of increasing the interest rate. Moreover, some banks will surely struggle to make any profit margin in this new interest rate.
Government has announced that it is going to keep 50% of their funds in private commercial banks as deposits. The deposits will be allocated to private banks on the basis of their paid-up capital. Therefore, it can be estimated that it would help private banks to mitigate their crisis of deposits.
It will be a great challenge for Government to implement the decision of single digit interest rate. At first, Government has to provide certain facilities to private banks to execute the decisions properly. It is also important to address that how a borrower would be declare eligible to obtain a loan in 9% interest rate. The borrowers will not be able to attain the exact benefit of new interest rate if there is scarcity of deposit funds. The policy makers have to be alert that the new single digit interest rate should not affect the financial health of banks. Government need to assess the impact of all the stakeholders before implementing the decision. Market should be the main determinant of interest rate thus real rate should be based on market demand and supply, ceiling could solve some immediate problem but it cannot be a long term solution.
Writer is Chief Executive Officer (CEO) of Business Initiative Leading Development (BUILD)
