Now NBFIs hike interest rates
After banks, non-bank financial institutions have now hiked their lending rates by two percentage points due to the sudden liquidity crisis in a development that will hit the SME sector.
Although the NBFIs account for only 4 percent of the total outstanding loans in the economy, the industry has a big exposure -- at least 20 percent of the total loans -- to the small and medium enterprises.
“The SMEs will be hit hard,” said Asad Khan, head of research of Prime Finance.
Prime Finance now charges a minimum of 16 percent for SMEs and 15 percent for corporate borrowers. Both the rates are two percentage points higher than what they were in November last year.
The liquidity crisis began from December last year as rumours started floating that the Bangladesh Bank will crack down on aggressive lending.
On December 17, the BB froze Tk 51 crore from ONE Bank's current account with the banking regulator and Tk 25 crore from Premier Bank's for breaching their loan-deposit ratio ceilings.
The move forced banks to run after deposits to adjust their ratio to a safe zone. As banks cannot recover loans overnight, boosting their deposits is the practicable way to bring down the ratio.
Then on January 30, the BB has instructed banks to bring down their loan-deposit ratio to 83.5 percent from 85 percent by June, further intensifying the competition for deposits.
Accordingly, banks that had offered 5 to 7 percent interest on fixed deposits for the last three years have hiked their rates to 8 to 9 percent or even more in recent days to attract funds.
The development though will bring cheer to savers, who had been suffering for more than three years for low returns on their deposits.
Now, the competition for deposits has hit the 33 NBFIs that rely on banks for funds.
The NBFIs cannot take deposits for less than three months and they cannot run current accounts like banks, so their source of funds is narrow.
Banks that used to give NBFIs an overdraft (OD) credit limit have either stopped offering them or raised rates.
For example, state-run Sonali Bank that gave credit to NBFIs at 11 percent in 2016 has increased the rate to 12.50 percent a year later.
Similarly, all other banks, be it government, private or foreign ones, have raised the rates for loans to NBFIs.
“One private bank has hiked the interest rate on OD credit to NBFIs to 14 percent now from 9 percent several months ago,” said Khalilur Rahman, managing director of National Housing Finance And Investments.
Excessive reliance on bank funds has made some NBFIs' business critical, said Rahman, also the chairman of Bangladesh Leasing and Finance Companies' Association, a forum of non-banks.
“There are some NBFIs who depend on banks for 50 percent or more of the loans they disburse.”
National Housing had lent at single digit interest rate, which is totally impossible now, he added.
“We are not getting funds from banks,” said Sami Huda, managing director of People's Leasing and Financial Services.
Banks are now asking for more than 14 percent interest on loans to NBFIs.
IDLC Finance is one of the few lucky NBFIs that run on retail deposits instead of funds from banks.
Still, the lender has raised the interest rates by two percentage points. IDLC offers 9 percent for deposits of 3-month tenure.
“This is not the first time that Bangladesh is witnessing rising rates on deposits and loans,” said Arif Khan, managing director of IDLC Finance.
Four years ago, the interest rates on deposits were 11-12 percent, he said.
All of them said the overall situation will benefit savers after several years' of low interest rates on deposits.
“They are happy that they are getting returns well above the inflation rate,” said Rahman of National Housing.