Outcry at interest rate capping
Capping interest rates will hurt the profitability of the banking sector and create a difficult situation for people looking to make deposits, according to experts.
It will also create a financial stability risk in the banking sector, they said in the final session of a day-long event themed, 'Bangladesh Economic Conference'.
Bangla daily Bonik Barta and City Bank jointly organised the conference to mark the 100th birth centenary of the Father of the Nation, Sheikh Mujibur Rahman, and the golden jubilee of the country's independence at the Pan Pacific Sonargaon Hotel in Dhaka.
The final session was named, the 'Financial Sector: Economy of Loan and Interest'.
Capping interest rates at 9 per cent will be a big blow to profitability in the banking sector, said Zahid Hussain, former lead economist of the World Bank's Dhaka office.
Depositors will no longer submit their funds as banks will not pay out more than 6 per cent interest on fixed deposit products (FDRs).
The limit on interest will also create a moral hazard on lending as borrowers may feel that the risk of taking a loan is decreased as the rates will seem low, Hussain said.
"The government is facing an upward trend of deficit to manage its fiscal budget. This has forced it to borrow from banks by issuing T-bills and bonds," he added.
This has resulted in an increasing trend of interest rates on government tools.
The interest rate on the government tools has increased to 8-9 per cent, which does not match with the government's decision to bring down the lending rate to single digits, Hussain said.
Earlier on December 30 last year, the government announced capping of interest rates on deposits at 6 per cent and on loans at 9 per cent.
"Bangladesh's ease of doing business index is poor and the risk of both business and default risks are high here."
So, setting interest rate ceilings for both is not a solution to bringing down the lending rate, Hussain said, adding that this could possibly make the financial sector unstable.
Taka will lose its appeal if banks set a low interest rate on deposits, said Ahsan H Mansur, executive director of the Policy Research Institute.
"Shadow banking now prevails in almost every village of the country. Depositors may embrace such informal sector services to get better returns," he said.
The small and medium enterprise (SME) sector, which is a major driving force for the country's GDP growth, will be deprived of their desired financing.
"We are now trying to build an inclusive economy. But this will not be materialised by creating a bar on access to finance to the SME sector. We should rethink the whole process to implement the capping of interest rates."
The interest rate on lending will automatically go down if default loans and inflation can be lowered, said Mansur, also a former official of the International Monetary Fund.
The focus should be on recovering default loans but there has been no discussions to that end, said Mohammed Farashuddin, a former governor of the central bank.
The 9 per cent and 6 per cent interest caps will create a problem for new banks in running their businesses.
The central bank should not fix any interest rate ceiling on SMEs and consumer loans like credit cards.
"I have doubts on whether the 9 per cent interest rate will be effective given the perspective of the market economy," Farashuddin added.
Not one central bank in the world determine the interest rates in their country as only commercial banks do so based on market demand, said Mamun Rashid, managing partner of PricewaterhouseCoopers (PwC) Bangladesh.
The government of Kenya earlier implemented such interest rate ceilings but was later forced to backtrack from its decision.
The single-digit lending rate will help businesspeople but it will not bring any good for depositors.
The low interest rate on deposits will encourage people to invest in land, gold and fictitious cooperative societies and multi-level marketing companies, Rashid said, adding that a good number of people will launder their money abroad as well.
Banks disbursed loans between 7 and 9 per cent interest rates in 2015 and 2016, said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.
The interest rate on lending was fixed by the market in line with market demand.
"We should improve corporate governance in the banking sector. And the authority concerned should strengthen the judicial system to tackle habitual defaulters."
Controlling habitual defaulters is a tough job as many of them usually take political shelter, said Rahman, also a former chairman of the Association of Bankers, Bangladesh, a forum of managing directors in the banking sector.
"We should boycott the habitual defaulters socially. Countries like Nepal have already taken such measures against the delinquents."
Remittance may decrease if the interest rate on deposits is brought down and a good amount of funds will escape the banking sector, Rahman added.
"We should accept the 9-6 per cent bound positively as there is no other option," said Mashrur Arefin, managing director of City Bank.
Banks should emphasise on developing human resources as a large number of employees are not digitally efficient, he added.
The four state run lenders -- Sonali, Janata, Agrani and Rupali -- have been following the single-digit interest rate for one and an half years, said Zaid Bakht, chairman of Agrani Bank.
"I do not see any cause to be panicked as Agrani Bank's deposit frequency has not declined despite setting a 6 per cent interest rate."
State run banks will welcome SME clients if they do not get loans from private banks, Bakht added.
The central bank has the power to determine the interest rate on all deposits and lending products as per the Banking Companies Act 1991, said Fazle Kabir, governor of Bangladesh Bank.
The central bank earlier set an interest rate cap on farm loans when the interest rate on lending increased, he said while addressing the event as chief guest.
Banks now enjoy excess liquidity of more than Tk 100,000 crore after maintaining their statutory liquidity ratio.
They will have to give out loans to SME and the manufacturing sector as lenders will not be allowed to decrease the funds flowing in to the industrial sector below their average credit growth in the last three years, Kabir said.
He went on to hope that investment would gain tempo due to the 9 per cent interest rate on lending.
"The central bank is following due diligence while taking this initiative. It recently provided a licence to a new bank after scrutinising it in detail for three years," Kabir said.
Dewan Hanif Mahmud, editor of Bonik Barta, moderated the event, where Khwaja Shahriar, managing director of LankaBangla Finance, also spoke.
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