Rajshahi Krishi Unnayan Bank (Rakub) has sought compensation of Tk 224 crore from the government for incurring losses from disbursing farm loans at the interest rate set by the Bangladesh Bank.

The state-run specialised lender said it had incurred huge losses from fiscal 2013-14 to fiscal 2017-18 as the central bank had slashed the interest rate on farm loans several times.

Huge competition now prevails among private banks over funds, which has compelled the specialised bank to collect the deposit at rates as high as 8.50 percent, it said in a letter to the finance ministry on March 3.

But, the bank has to disburse farm loans at 9 percent interest rate in line with the central bank's instruction. The finance ministry forwarded the Rakub's proposal to the central bank for vetting.

A BB official, however, described the demand as illogical as the interest rate on farm loan is still lower than the weighted average rate for lending set by the state and private lenders.

The weighted average interest rate on lending declined to 9.55 percent in February from 13.61 percent in 2013.

Between 2013 and 2017, the weighted average interest rate on demand loan, construction loan, transport loan, consumer loan, and trade and commerce loan, decreased significantly.

This prompted the central bank to adjust the rate on farm loans accordingly, seeing that agriculture is a priority sector.

The BB had cut the interest rate on farm loans from 13 percent to 11 percent in January 2015 and to 10 percent in June 2016. The rate was slashed further in January last year to 9 percent.

All private and state-owned commercial banks have been disbursing farm loans in line with the Agricultural and Rural Credit Policy and Programme of the central bank and no one was allowed such compensation, the BB official said.

“It is true that the rates for both lending and deposit have recently increased, but the time is yet to come to bring down the interest rate on farm loans considering the weighted average rate on lending.”

The finance ministry should reject the proposal just by looking at the existing weighted average rate on lending, the BB official said.

He said the reason for Rakub's large losses in recent years is the high non-performing loans: as of December, it stood at 23.48 percent of its disbursed loans of Tk 4,951 crore.

Rakub also faced a capital shortfall of Tk 813 crore at the end of December last year.

Last year, Rakub sought compensation of Tk 119.63 crore from the finance ministry, but the demand was rejected after taking the central bank's opinion.