Single digit interest rate: Boon for state banks, bane for private banks

Private commercial banks are losing clients due to high lending rates while state-run banks are overwhelmed with clients as they implemented the single digit lending rate in line with the government's instructions.

Borrowers are switching banks to avail the low-cost lending rate facilities.

The lending rate is 9 percent in the state-owned banks but private banks are still lending at above 12 percent interest. As a result, big borrowers are borrowing from the state banks, making business more competitive for the private banks.

Three big borrowers switched to Rupali Bank to avail the 9 percent interest rate facility in order to reduce business costs.

The three borrowers are Sky Capital with loans of Tk134 crore, Dabiruddin Spinning Mills Limited (Tk394 crore) and Dhaka Textile (Tk87 crore).

Rupali Bank agreed to take over the combined loans of over Tk600 crore as the track record of all three borrowers is good.

Analysing the regular payment records of the borrowers, the Bangladesh Bank allowed Rupali Bank to buy such a large amount of loan. The local branch of Rupali Bank purchased the loan.

Khan Iqbal Hossen, manager of the branch, told The Business Standard that the three borrowers switched banks just to take the advantage of the low interest rates.

He said the state-run banks cannot lend beyond 9 percent interest rate due to government instructions even though private banks are lending at rates between 11 and 12 percent.

"If a borrower with Tk100 crore in loan gets a 2 percent reduction in interest rates, it will be able to save Tk2 crore annually. That is why good borrowers are moving to state banks to save business costs," explained Iqbal.

Dhaka Textile, known as Pride, was the client of Midland Bank, a fourth-generation bank with lending rates of above 11 percent. When the company moved to Rupali Bank, it got a 2 percent reduction in interest rates, allowing it to save over Tk1.5 crore annually.

Mohammad Masoom, additional managing director of Midland Bank, said the client has a good loan repayment history and moved to Rupali Bank only because of low interest rates.

He said the fourth-generation banks do not have the capacity to bring down lending rates to single digit as their deposit cost is high.

"The deposit cost of new banks is above 9 percent. So, there is no scope to manage a single digit lending rate. High lending rate makes business more competitive for private banks, mostly for the fourth-generation banks," explained Masoom.

He said Midland Bank is trying to reduce its default loan in order to improve its competitiveness.

"Reducing default loan is the only option for private banks to face the challenges of single digit lending rate," he added.

According to Rupali Bank, Sky Capital switched from Trust Bank, and Dabiruddin Spinning from several private banks, including Dutch-Bangla Bank Limited.

In August, the Bangladesh Bank sent letters to all banks, asking them to bring down interest rates on loans to single digit in line with their commitment to the government.

Earlier, Finance Minister AHM Mustafa Kamal announced that single digit interest rates would be implemented after the issuance of a circular by the central bank in this regard.

Despite that, private banks did not reduce their lending rates to single digit amid liquidity crunch and rising cost of funds.

Last year, almost all private banks saw a 10 percent to over 30 percent rise in their cost of funds because of aggressive deposit collection at high interest rates amid huge liquidity crisis.