Government orgs to get no more than 6pc on deposits

Government organisations will get 6 percent interest on their deposits with private banks and 5.5 percent with state-owned banks, the finance ministry declared yesterday.

The strategy is part of the government's move to lower lending rates to 9 percent from April 1 amid businessmen's longtime complaints that banks charge overwhelmingly high on loans that make doing business costly.

Financial Institution Division of Finance Ministry has issued a circular to this effect yesterday, saying the rates will be effective immediately.

"Interest rate needs to be brought down at a single digit to stimulate investment and create employment for achieving the expected growth," said the circular.

The circular also said the autonomous and semi-autonomous bodies can deposit 50 percent of their funds allocated under the Annual Development Programme with the private banks and non-bank financial institutions.

However, provident fund, pension and endowment funds will be subjected to the interest rate cap.

There are 68 state-owned autonomous organisations which have Tk 212,100 crore deposited with banks.

Businessmen have welcomed the move, saying it would lead to a lower lending rate.

Shams Mahmud, president of the Dhaka Chamber of Commerce and Industry, the decision will spur private sector credit.

He, however, said it must be ensured that the provision does not only benefit the banks but that the benefit flows down to the entrepreneurs.

"We need low-cost funds as the ready-made garment sector is facing stiff competition," said Shams who is also the managing director Shasha Denims, an apparel factory.

"But the bankers have got a lot of facilities in the past by promising to offer low interest rates, but they did not implement their decisions," he added.

However, economist Ahsan H Mansur who is the executive director of the Policy Research Institute (PRI) said the government's interference in capping interest rate is completely illogical as micro-economic management is not the finance ministry's job, said.

Moreover, the provision of keeping 50 percent deposits with private banks will encourage under-hand dealings, he said.

Instead of dictating, the government should let the market determine interest rates based on demand, he observed.

If the government's decision is implemented, banks will bring down lending rate at a single-digit even if it means loss for them, said Md. Nazrul Islam Mazumder, chairman of Bangladesh Association of Banks (BAB).

Earlier in June 2018, he on behalf of BAB announced bringing down interest rate on deposits at 6 percent and lending rate at 9 percent from July 1 that year.

The move came weeks after the government cut cash reserve ratio one percentage point to 5.5 percent against the promise of bank sponsors that they will bring down interest rate to a single digit.

Since then, the Bangladesh Bank and the government repeatedly instructed the banks to implement their promise but most of the banks did not do it amid liquidity crisis.

After taking charge of the finance ministry in January last year, AHM Mustafa Kamal promised to implement single digit interest rates but could not do it and changed the deadline several times to implement it.

Finally, on December 30 last year, he expressed his strong determination to implement single digit interest rate from April 1.

As part of that, the government yesterday issued the circular of capping interest rate on government deposits.

Earlier in April 2018, the finance ministry issued a circular doubling the share of government deposit for the private banks to 50 percent in the face of bank owner's demand.

Although the government did not cap any interest rate, it had verbally instructed the autonomous organizations to deposit at 6 percent rate with the banks.

But most organizations did not follow the instruction.

Currently, the autonomous bodies get over 10 percent interest rate against their deposits with banks.