9% interest rate cap on loans set to go in July

The Bangladesh Bank has finally agreed to move away from the 9 per cent interest rate ceiling on loans and implement a market-based rate from July 1. 

Banks have been following the interest rate cap since April 2020 in line with the central bank's instructions.

Analysts have long been demanding the removal of the ceiling saying the cap is not relevant to the market-based economy. Rather, it has created a distortion in the financial sector as a whole.

Recently, their calls have grown louder after inflation hit a multi-year high last year and has stayed at the elevated level, since cheaper loans have not helped the country's fight against escalated consumer prices. 

The International Monetary Fund also suggested the government follow the market-based interest rate mechanism.

"The central bank has already fixed a structure to set the new rate and it will be unveiled in the next monetary policy to be declared in June," said BB Spokesperson Md Mezbaul Haque.

The issue was discussed in detail at a bankers' meeting at the BB headquarters in the capital yesterday. Such meetings are usually held every three months to discuss burning issues in the banking sector.

Analysts have long been demanding the removal of the ceiling saying the cap is not relevant to the market-based economy. Rather, it has created a distortion in the financial sector as a whole

Abdur Rouf Talukder, governor of the central bank, presided over the meeting where managing directors of all banks were present.

In January, the BB relaxed the lending rate cap for consumer loans, allowing banks to hike it up to 3 percentage points. This means banks can charge up to 12 per cent in interest rates on consumer credits.

The central bank will initially set a monthly reference rate based on the weighted average rate, which is calculated on the basis of the interest rates of the short-term treasury bills, Haque told reporters after the meeting yesterday.

The BB will also set another weighted average rate every six months based on the monthly weighted average rates, he said.

The BB has primarily calculated a six-month reference rate of 6.98 per cent.

"We have initially thought of keeping a range of 3 per cent that can be added to the weighted average rate," Haque said.

The rate will be called the short-term moving average rate (SMART), which will be adjusted every month considering the interest rates of treasury bills.

"The range of 3 per cent will also be variable as the central bank fixes it based on the nature of the market," Haque said.

"We are still examining the issue. Banks will be allowed to change the SMART, but they will not be allowed to charge beyond the rate."

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, welcomed the central bank move, saying it will establish a long-cherished market-based interest rate.

"But we will have to wage an awareness campaign among clients as SMART will see changes every month," he said.

BB's Haque says that the central bank is monitoring every transaction of letters of credit so that no business quotes the price of imported products falsely.

Banks usually open 1,500 to 2,200 LCs each month.

"The value related to LCs has decreased significantly than in the past thanks to the central bank's monitoring," Haque said.

"This means dishonest businesses can't quote higher prices of the products than the actual rate. This has prevented money laundering."

The central bank will also monitor the export bills to ensure the repatriation of the actual earnings generated from the sales of products in foreign markets. And Haque expects the process to establish transparency in the export sector.

At the meeting, banks were asked to gear up cashless transactions.

"If we can raise cashless transactions, banks will enjoy more liquidity as it will keep money in the banking sector," Haque said.

The central bank also held separate meetings with 10 banks for breaching rules in mobilising remittances. The banks offered higher rates than the rate set by the Bangladesh Foreign Exchange Dealers' Association (Bafeda).

As per the Bafeda decision, no bank can offer more than Tk 107 per US dollar to collect remittances from exchange houses and other sources.

The central bank asked the banks to follow the declared rate, or else it will take action against the errant banks.