Govt’s solid plan for single-digit interest rate | The Daily Star
12:00 AM, December 30, 2019 / LAST MODIFIED: 12:00 AM, December 30, 2019

Govt’s solid plan for single-digit interest rate

Loan-deposit ratio to increase

Bangladesh Bank is set to raise the loan-deposit ratio by another 1 percentage point as it looks to reduce the interest rate for manufacturing sector and increase lendable fund of banks.

At the same time, the finance ministry is taking a measure to bar government entities from seeking more than 6 percent interest rate on deposits from banks.

The concerted moves come as part of the government’s efforts to give a shot in the arm to the embattled banking sector.

Notices on the two would be issued very soon, Finance Minister AHM Mustafa Kamal told The Daily Star yesterday.

At present, the loan-deposit ratio is 85 percent for regular banks and 90 percent for Islamic banks.

In other words, for every Tk 100 of deposit regular banks can lend Tk 85. But soon, they will be able to give out Tk 86 and Islamic banks Tk 91.

This will cause a surge in loanable funds by about Tk 10,000 crore, Kamal said.

Concurrently, the central bank will issue a notice to cap the interest rate on manufacturing loans, which is set to go down to single digit in a couple of days’ time.

The development comes after the central bank formed a seven-member committee earlier this month to come up with ways to bring down the interest rate to single digit as per an instruction from the finance ministry.

Banks now charge interest rates between 12 percent and 14 percent for industrial loans, which manufacturers deem excessive. With a view to boosting private investment and job creation, the government has set its sights on lowering the rate to single digit.

The committee headed by its Deputy Governor SM Moniruzzaman submitted a report to the finance ministry and the BB board on December 24, based on which the notices will be issued.

The lift in loan-deposit ratio is a positive move of the government, Zaid Bakht, a member of this committee and chairman of Agrani Bank, told The Daily Star yesterday.

Banks’ loanable funds will increase as a result and their cost of funds will come down too.

Their profit margin will not reduce significantly due to the single digit interest rate as banks will get benefits from the central bank and the government, Bakht said.

About 50 percent of the government deposits will be kept in private banks and the interest rate will be 6 percent, Kamal said.

This will bring down the banks’ cost of funds.

But they will have to give out loans to the manufacturing sector at single digit interest rate from January 1, as per the government plan.

However, high officials of banks said if the interest rate comes down to single digit they will cut back on their lending to the industrial sector to safeguard their profit margin.

But the finance minister said they will keep a close watch so that this scenario does not materialise.

“We will make sure that their lending to the manufacturing sector does not go down below their three-year average,” he said, adding that the government has been extending a number of facilities to banks in the last three years for the sake of reducing the interest rate to single digit.

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