The 6 percent and 9 percent conundrum
The government has decided to fix a uniform interest rate for all types of deposits at (6 percent) and slash interest rate to single-digit for borrowing (at 9 percent) from April 1. There are four parties to this decision.
First the borrowers. They are jumping with joy. They have always felt that because of high interest rates they couldn't invest enough and whatever they borrowed and invested did not bring sufficient profit to repay the bank loans that made them loan defaulters. They argue that lowering of bank lending rates will bring down the overall cost of doing business and thus encourage more investment, which will lead to greater industrialisation, leading to greater employment, greater purchasing power, greater effective demand, etc. This argument belies the fact that most businesses performed well even with high bank interest and that it was always a handful of big loan takers who defaulted.
The second party are the savers. They feel betrayed as their savings will now bring in smaller returns on which they depend for their livelihood. This move will severely hurt the fixed income group and the pensioners. With Sanchaypatra being of limited supply and constrained by other formalities, the small savers will have nowhere to go but suffer silently.
The third party are the banks. They are really in a bind. The forced reduction of interest on loans will greatly reduce their income. Without really addressing the reasons for high lending rates imposed by the banks—caused by the high amount of non-performing loans (NPL)—the arbitrary lowering of interest rates will definitely increase the vulnerability of the banks. The fact that government has already borrowed almost the total amount of Tk 47,000 crores provided for in the budget adds to their worry. Given 6 percent inflation and service charges of the banks, 9 percent interest from loans will hardly leave much margin for the banks to make profit from. Also, not addressing the problems of NPL—the single biggest reason behind high interest—leaves the banks extremely worried about how diligent the future borrowers will be in repaying the loans.
The last party is the government. Its eagerness to boost investment and possible industrialisation and employment has made it tilt too much towards the interest of the business community at the cost of others.
We conclude with the view that the government has taken a very risky decision. The record of NPL shows that a powerful section of our bank borrowers has gotten into the habit of not repaying bank loans in spite of several opportunities for rescheduling often at easier terms. Without any measure of ensuring greater accountability for the big wilful defaulters, this decision increases the risk of jeopardising our whole financial sector and as such the economy as a whole. We hope the government is fully aware of the risks it has taken.
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