Banks ordered not to raise industrial term loan instalment amount despite hike in interest rate

The central bank has directed banks not to raise instalment amounts for industrial term loans and housing finance, even as the market-based interest rate has jumped recently due to market-based rate adjustments.

The Bangladesh Bank issued a circular in this regard today (25 June), asking the managing directors of all scheduled banks to comply with the instructions.

Customers who took industrial term loans and house finance loans before July 2023 will enjoy the facility, the central bank said in the circular.

However, borrowers who have been identified as defaulters as of 31 March 2024 will not be eligible for the facility. It also does not apply to loans provided from incentive packages or special funds from the central bank or the government.

The rise in interest rates for industrial and individual housing construction loans, driven by market-based rates amid the global economic downturn, has created repayment difficulties for customers, according to the circular.

Therefore, this circular has been issued to address these issues, said the central bank.

Bankers have panned the move, saying banks are facing a liquidity crisis, with many having to collect deposits at high interest rates.

Amid such a situation, providing borrowers with such facilities is not rational in any way, they said.

An official from the central bank said the decision has been made as interest rates on many loans have increased to 14% from 9%, causing customers to struggle with loan repayments.

The managing director of a private bank told TBS that such directives are logical for housing finance, especially since many borrowers have fixed salaries and sudden increases in instalments can make it difficult for them to repay loans.

However, borrowers of industrial term loans typically manage larger businesses, and are less likely to struggle with loan repayments, added the banker.  

According to Bangladesh Bank's data, industrial term loans constituted 21.22% of total loans, totaling Tk3.31 lakh crore as of March 2024. Urban and rural individual house loans amounted to Tk41,627 crore, about 3% of total bank loans. 

A credit department official at a government bank noted that roughly 50% of industrial loans in the country are term loans. 

If instalment amounts cannot be increased, it could impact banks' cash flow, although the effect may be minimal if such instructions are temporary, said the official.