Borrowers under pressure as lending rate hits 16% in July

The interest rate on consumer loans hit a maximum of 16% in July, as banks drastically raised lending rates due to high inflationary risks, putting borrowers under severe repayment pressure, according to banks.

Borrowers experienced a rise in interest rate costs of up to 77.7% in the last one year after the lifting of the 9% lending rate cap in June 2023.

A significant surge in loan costs over a short period has increased default risk, as fixed-income borrowers are facing difficulties in continuing debt servicing, said industry insiders.

When borrowers are already under pressure, the Bangladesh Bank is set to announce another tight monetary policy this week for the first half of the fiscal 2024-25 to tackle consistently elevated inflation, which reached 9.72% year-on-year in June.

The central bank's continuous contractionary monetary policy over the last two years to rein in inflation by raising policy rates has put some banks in a liquidity crunch, prompting them to slow down consumer lending by raising loan costs, according to industry insiders.

Moreover, some banks slowed down consumer loans as a strategic decision, preferring to invest in government bonds and Treasury bills due to the high returns instead of risky lending, they said.

 As a result, the lending rate for consumer loans at banks with good financial health increased to over 13%, while weaker banks are charging up to 16%, discouraging borrowers from taking loans or prompting them to go for early repayment to avoid additional costs.

Sharing his experience, a borrower who took a home loan from AB Bank at a 9% interest rate in 2022 experienced interest rate increases twice in a year since the introduction of the Six-Month Moving Average Rate of Treasury Bill (SMART) in July last year.

He received notice of the interest rate rising to 13% after the introduction of the new SMART formula and a second hike to 16% in July after the SMART formula was lifted in May this year.

In May, the Bangladesh Bank removed the SMART lending rate mechanism, allowing banks to set their lending rates based on demand and supply dynamics.

Borrowers experienced an interest rate hike of a minimum of 1 percentage point and a maximum of 3 percentage points after the end of the SMART mechanism.

An AB Bank borrower, who preferred not to be named, said a drastic rise in interest rates has changed his repayment schedule. He is now planning to settle the loan early, fearing further interest rate increases.

Moreover, he added that the existing additional loan costs have already exceeded his repayment capacity.

When contacted, a senior executive of AB Bank said they raised the lending rate for both home and personal loans to 16% following an end to the SMART rate formula. He mentioned that consumer loan demand has sharply declined due to the high interest rates.

Dutch-Bangla Bank, a major player in retail banking, raised its lending rate for personal loans to 13%, the highest among its peers. The bank, known for its previously low interest rates, has experienced a drastic decline in retail business in recent months due to the higher interest rates, according to a senior executive of the bank.

He stated that four banks, including City Bank, BRAC Bank, Standard Chartered, and Dutch-Bangla Bank, accounted for 50% of the total retail banking market share.

Among these four, Dutch-Bangla Bank was leading in competition due to its previously lowest lending rates. However, the bank lost its business after raising lending rates higher than those of its competitors, he added.

City Bank and BRAC Bank raised their interest rates by 1 percentage point after the SMART mechanism was lifted and are now charging a maximum of 12% plus, according to the banks.

When speaking with The Business Standard, a senior executive of a private commercial bank said most banks have made strategic decisions to slow down consumer lending due to high inflation risks. Therefore, they have drastically raised interest rates to discourage customers from taking out loans.

He mentioned that banks are now preferring to invest in Treasury bills and bonds, as interest rates have increased to 12% or more.

He added that bank officers have been instructed by management to focus on acquiring more deposits to invest in bills and bonds instead of consumer lending.