Single-digit lending rate remains elusive

Bringing down the lending rate to single digits seems unlikely in near future as the banking sector in the country is suffering from 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. 

The Bangladesh Bank (BB) has also backtracked from its earlier decision of issuing a circular capping the lending rate to single digits. 

The regulator, instead of issuing a circular, has recently sent letters to all banks asking them to bring down interest rates on loans to single digits in line with their commitment to the government. 

Earlier on August 4, Finance Minister AHM Mustafa Kamal announced that single-digit interest rates will be implemented through the issuance of a circular by the Bangladesh Bank. Bangladesh Bank Governor Fazle Kabir was also present at the time of the announcement. 

Being asked about the latest development in this regard, the BB governor told The Business Standard, “We have sent letters to all banks advising them to bring down their lending rate to 9 percent and deposit rate to 6 percent, which they themselves have committed.”

The letter has been sent in response to the finance minister’s announcement, he noted. 

“Single-digit interest rates still remain a distant dream,” observed Mashrur Arefin, managing director of City Bank. 

“We want to implement it but the reality is different because cost of funds of the banks are rising due to high deposit rates,” he said. 

“How can the banks reduce their lending rates, if deposit rates remain high?” he said. 

When the government is forcing banks to collect deposits at 6 percent interest rate, government institutions are unwilling to keep deposit at this rate, he noted.

He went on to say that if government institutions keep deposits at 9 to 10 percent interest rates, there is no logic behind getting deposits from individuals at 6 percent rate.

Moreover, interest rates on savings instruments are still above 10 percent, he mentioned. 

Against this backdrop, he opined, there is a need for devising a comprehensive strategy in order to implement single-digit interest rates.

Meanwhile, despite the central bank’s repeated calls to the banks for reducing lending rates, the weighted average interest rate on loans increased for the consecutive second month in June. 

The average lending rate increased to 9.58 percent in June from 9.51 percent in the previous month, according to Bangladesh Bank data. 

Amid the pressure of capping the lending rate at single digits, banks have become reluctant to lend fresh loans, causing a 5-year lowest private sector credit growth of 11.29 percent in June.

As most banks are hunting deposits at interest rates above 9 percent, deposit growth improved significantly to 9.19 percent in June from 7.38 percent in the previous month. 

However, the average interest rate on deposit slightly declined to 5.43 percent in June from 5.46 percent in May, central bank data shows. 

The average deposit rate marked a fall since state-owned banks are taking deposits at less than 5 percent interest rate.