Rate capped at 9% for all loans but credit cards

No loan would cost more than 9 percent interest except credit card, a decision that can cheer up the businesses, but will cause havoc on some banks that have big exposure in small and medium enterprises (SMEs) and retail loans.

However, interest rate on export credit at pre-shipment level will remain unchanged at 7 percent.

The central bank on Monday made it clear by issuing a circular that said the new directives will be effective from April 1 this year.

The BB capped the lending rate at 9 percent by ignoring bankers' call to keep SMEs out of the restriction as loans to this sector cost them much higher than corporate ones.

High operating costs, deployment of more people, unsecured nature of the loan, credit assessment, verification process, documentations and collection of loan, all made SME and retail loans expensive for banks.

"This will be a disaster to some lenders," said a top banker requesting not to be named. "There is no way that we can lend SMEs at 9 percent interest."

Some banks, which have been expanding fast in SME and retail loan due to rising purchasing power of consumers, consider this cap as a big blow.

"Banks do business with public money…they are not here to lose. Many banks will now take fees and commissions from clients," he said.

Businesses, however welcomed the decision, saying that it will have a positive impact on the economy.

"We are very happy to see that the lending rate will finally come down to single digit. This will help us reduce our cost of production," said Abul Kasem Khan, former president of Dhaka Chamber of Commerce and Industry.

Bangladesh's banking sector has been struggling with rising nonperforming loans that stood at nearly 12 percent at the end of September last year. But this toxic assets have come down to 9.32 percent in December because of wholesale rescheduling of loans.