Single Digit Interest Rate: Make govt deposits interest-free

 It has always been the law of supply and demand that determined the interest rate at which one can borrow.  

When the demand is up and the supply is down the price goes up -- and this is exactly what is happening in case of lending rates.

Instead of fixing the problems in the supply side of funds, instead of mending the ills, the government is coming up with one impractical solution after another to bring down the interest rate on lending to single digits.

For instance, the government committee on implementing the single digit lending rate has now come up with the idea of making government’s deposits of its project funding interest free.

About Tk 230,000 crore of the government’s development budget is currently parked with banks, which is 20 percent of total deposits in the banking sector.

Having to pay no interest against this sizeable amount will surely bring down the cost of funds for banks -- is what the seven-member committee headed by SM Moniruzzaman, a deputy governor of the Bangladesh Bank, presumed when it came up with the recommendation.

Experts voiced their scepticism about the effectiveness of the move, as the sponsors of banks have managed a number of undue facilities from both the central bank and the government in the last two years by dangling the promise of implementing single digit lending rate.

The government has provided various benefits to banks including a reduction of cash reserve ratio -- which is the percentage of total deposits banks must maintain in the form of cash reserve with the central bank -- and repo rate -- which is the rate at which the central bank lends money to banks.

Banks pledged to bring down the interest rate to less than 10 percent by August 2018, but in the end they did not keep their word. And now, a fresh round of facility is in the offing.

“The leaders of banks’ sponsors have already lost their credibility,” said Khondker Ibrahim Khaled, a former deputy governor of the central bank.

They even gave their word to the prime minister to this end, but they did nothing, he added.

“In a free market economy the interest rate is always determined by demand and supply, so the proposal will not help decrease the interest rate on lending,” said Ahsan H Mansur, executive director of the Policy Research Institute.

Not just that, the existing troubles of the banking sector will aggravate further because of this.

Lenders will engage in ill competition to hook the funds.

“Banks will offer bribes to government officials to manage the funds,” said Mansur, also a former economist of the International Monetary Fund.

Khaled said only those who will bring down the interest rate can be allowed to enjoy the facility.

The government organisations are keeping their funds in the form of short-term fixed deposit with banks, against which they enjoy six to eight percent interest.

The government funds, which are used for implementation of annual development programme, will have to be deposited in current accounts with banks, a committee member said. Lenders do not pay interest on deposits in current accounts.

There is no need to keep the project fund in the form of fixed deposits as they will presumably be used up shortly, he said.

The central bank formed the committee on December 1 comprising representatives from private and state-owned banks. The committee has been asked to submit its recommendations within seven working days.