Sudden hike in interest rate rattles industry

A sudden but significant rise in interest rates has emerged as a threat to the local industry, which is already feeling the pinch of a record devaluation of the taka against the dollar.
Bankers forecast that a rising interest rate can lead to an increase in default rates.
Earlier this month, Bangladesh Bank (BB) withdrew the cap on lending interest rates, except on farm credit, to put brakes on soaring inflation. BB had placed the cap in April 2009 in the backdrop of the world economic crisis.
Soon after the cap was withdrawn, banks that were collecting deposits at higher costs to maintain the regulatory ratio entered a race to raise the lending rate.
The borrowing cost increased 4-5 percentage points in the past two weeks.
The lending rate for commodity imports, which was 12 percent, went up to 17-18 percent. Similarly, the cost of borrowing for corporate loans (both term loan and working capital) and small and medium enterprise also shot up 3-5 percentage points.
“I came to know last week that my bank has increased the interest rate by 4 percentage points to 18 percent,” said Mizanur Rahman, a bicycle manufacturer.
Shaheenur Alam, a small businessman, who borrowed funds initially at 13 percent, has now been asked to pay 18 percent. Moreover, he is facing difficulties with depreciation of the taka as he imports raw materials.
In addition, bankers are unhappy with the rapid rate hike. Senior bankers said the banks are in a mad rush to collect deposits at any cost to maintain a loan-deposit ratio at 85 percent set by the central bank.
Shahjahan Bhuiyan, managing director of United Commercial Bank, described the interest rate rise, for both deposits and lending, as reckless.
“This is an unhealthy environment, not competition among the banks,” said Bhuiyan.
He is however not surprised to see the 14-15 percent interest for deposits, taking 12 percent inflation into account. Last year, the Association of Bankers Bangladesh, a forum of bank chief executive officers, set the highest deposit rate at 12 percent, which was never followed.
Helal Ahmed Chowdhury, managing director of Pubali Bank, said banks should fix the rated rationally. He blamed the unusual interest rate hike on treasury mismanagement by some banks.
“We should be self-restricted.”
Both bankers agreed that this spike in interest rate may lead to an increase in non-performing loans.
Amjad Khan Chowdhury, chief executive officer of Pran-RFL Group, however, is more concerned with an increase in other costs than the financial cost.
“The financial cost is a very small component compared to other costs. Poor roads, transportation and doing business cost more than the lending rate hike,” said Chowdhury, also the president of Metropolitan Chamber of Commerce and Industry.

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