All loans at 9pc interest from Apr 1

Banks will have to fix the interest rate for lending at 9 percent from April 1 next year as per Prime Minister Sheikh Hasina’s instruction -- a move that can go on to theoretically break down the market mechanism for funds. 

“We earlier took a decision to implement single-digit interest rate for only the industrial sector, but now it will be for all sectors except credit cards,” Finance Minister AHM Mustafa Kamal told reporters after a meeting with private banks’ sponsors and managing directors at the headquarters of Bangladesh Association of Banks (BAB).

The PM wanted the single-digit interest rate within the next two months, but banks have sought an additional month, he said, adding that the central bank will issue a notice on this within a day or two.

“The single-digit interest rate will be applicable for all fresh and old loans.”

At the same time, banks will have to pay 6 percent interest on deposits.

Quizzed whether the new decision would go against the free market economy, Kamal said: “This is free market economy. When Lehman Brothers filed for bankruptcy in 2008, didn’t the US print dollars?”

“Banks are in agreement with the government’s instruction,” said Md Nazrul Islam Mazumder, chairman of BAB.

Asked whether banks would face losses because of the latest decision, Kamal said the government would provide support to banks for a while to tide them over.

For instance, 50 percent of the government funds will be kept in private banks from now on. Previously, they were deposited with state banks.

This would provide the banks a steady supply of funds.

When his attention was drawn to a previous identical government measure, he said: “This time we will make sure this instruction is executed properly.”

The fund will be kept at 5.5 percent interest rate in state-run banks and at 6 percent in private banks, Kamal said, adding that the private banks would get funds in line with their paid-up capital.

“No bank will be allowed to take deposit beyond six percent.”

But there would be some losses for banks as they will have to cash out a portion of their fixed deposit receipts (FDR) before their due date, Kamal said.

Banks earlier pledged to bring down the interest rate to less than 10 percent by August last year, but in the end they did not keep their word despite bagging a number of facilities to bring down lending rate.

The government provided various benefits to banks, including a reduction of cash reserve ratio -- which is the percentage of total deposits banks must maintain in the form of cash reserve with the central bank -- and repo rate -- which is the rate at which the central bank lends money to banks.

Asked why banks had not kept their previous promise of bringing down the interest rate on lending to single digit, Mazumder, who is also the chairman of Exim Bank, said there has been a difference between the two commitments.

“We earlier tried to lower the rates as per our own decision despite the fact that we did not enjoy full government support to do this,” he said, adding that the government agencies did not keep their deposits in private banks as agreed then.

The latest decision will be implemented soon because of the finance minister’s strong role here, he said.

“We strongly believe that the new decision will not fail under any circumstance and no additional support will be required for banks for implementation of the decision.”