Thursday | 16 January 2025 | Reg No- 06
বাংলা
   
Thursday | 16 January 2025 | Epaper

Where will bank interest rate reach?

Published : Sunday, 1 September, 2024 at 12:00 AM  Count : 482
M A Masum
Creating financial stability is essential for all types of people of the country. Bangladesh Bank frequently changes in basic policies of the banking sector which creates confusion among customers. Abdur Rouf Talukder joined as Govronor on 11 June 2022 of Bangladesh Bank and. recently resigned. He has made several changes in the policy of determining interest rate of loans. Commercial banks and Non bank financial institutions change their interest rates frequently. As a result, exporters, importers, other businessman and depositors are getting confused.   

After a gap of four years, the banking sector in Bangladesh has returned to a market-driven interest rate regime at the prescription of the International Monetary Fund (IMF) in 2022, in order to step up its fight against elevated level of inflation. The move to a market-based lending rate was one of the conditions for the IMF's $4.7 billion loan to Bangladesh. The central bank took the decision as people have been struggling with the high level of prices for around two years.

At the same time, it took initiative to increase interest rates under the contractionary monetary policy to prevent rise of inflation. As a result, interest rate limit on loans was lifted in central bank's monetary policy for the first half of 2023-24 fiscal year. There are different corridors of varying width for the lending rates. The vehicle BB has decided to use for influencing the bank lending rates is abbreviated SMART (Six Month Moving Average Rate of Treasury). The central bank introduced SMART by lifting interest rate limit on loans under terms of IMF from July 2023.  In addition, to manage liquidity of banks, the upper limit of policy interest rate corridor is fixed at lower limit. The upper limit will be supported by a Standing Lending Facility (SLF) meaning banks can borrow from BB. The lower bound (currently reverse repo) is supported by a Standing Deposit Facility (SDF) meaning the bank can deposit money with BB at this rate. The main objective of raising the policy interest rate is to reduce the supply of money in the market to control inflation. 

The rate of interest on loans is increasing every month. The monetary policy has been made more contractionary after inflation reached the highest level in the last 13 years. Eminent economist Ahsan H Mansur has been appointed as the governor of Bangladesh Bank by interim government. Bangladesh Bank (BB) is expected to hike the policy rate or repo rate by 50 basis point to 9 percent from the existing 8.50 percent next week to tame skyrocketing inflation. As a result, all types of interest rates are expected to rise further and additional money will have to be spent against loans. Meanwhile, private commercial banks are setting interest rate of the loan at 15/16 percent. On the other hand, the interest rate of non-bank financial institutions is higher. When interest rates rise, it increases the cost of a project. Thus, it will be difficult to make the project profitable, increasing the probability of loan default. High interest rates also reduce the number of eligible projects. A project becomes viable only when its rate of return is higher than the cost of borrowing.

Consumers and investors are worried about rising interest rates. As a result, the cost of doing business goes up. Installments of fixed income customers, especially low-middle income customers, who obtained home loans before pandemic, have now almost doubled compared to before. Many good borrowers are defaulting, albeit reluctantly, because installment size is inconsistent with their income. Because when customer took loan, installment of loan was within his means. But at present, even if income does not increase, loan installments have almost doubled compared to before, which has gone beyond his income. As a result, it becomes difficult to repay the loan. Due to the continuous recession in the country's economy for the last few years, relatively small businessmen have been in dire straits. They are also in distress due to mounting debt. 
Due to pandemic, recovery of loans of banks has also decreased due to the two-year moratorium on loans. As a result, banks have reduced their lending rates. In such a situation, bankers fear that liquidity crisis will increase further due to increase in interest rates. Because, installments of many borrowers may become irregular due to the increase in the cost of repaying the loan installments. On the one hand, there is inflationary pressure, on the other hand, there is an increase in the interest rate of the bank, both the borrowers are under pressure. Analysts believe that the interest rate should be affordable for all categories of borrowers. 

It will be difficult to control inflation by increasing policy interest rate alone. The steps taken to reduce inflation by increasing policy interest rate, it takes time to have an impact on the market. Rather, a coordinated effort is now needed to control inflation. Along with interest rates, tax cuts and deficits in market management and supply must be addressed. Strict market monitoring is required. It seems that the syndicate still exists. If the syndicate can suppress the traders, inflation can be controlled quickly. A large part of the country has been severely affected by floods. For example, government spending will have to be increased in areas that are prone to flooding. At the same time, low-interest loans should be provided to the affected farmers. As inflation comes under control, interest rates have to be adjusted.

The writer is an economic analyst 



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