For a lower lending rate in the economy

Abu Ahmed | Published: June 20, 2018 21:19:53


Now that the Prime Minister herself wants an interest rate below double digit, there is hope that things will move in a positive direction. Bangladesh economy has for quite long interest rates higher than other comparable economies in the world. But the policymakers, especially the regulator Bangladesh Bank, has not apparently taken the issue seriously. The Bangladesh Bank has been too much concerned about the issue of a rising inflationary pressure. It has all through been taking extra precaution in programming the credit supply to the private sector in a very conservative manner. As a result, the interest rate has never gone down to the level desired by the investors; and the economy also has not received the desired investment.

The price of borrowing or the interest rate is important to the borrowers who have to make profit by using the borrowed funds. If a borrower cannot earn a profit by using the borrowed money, he would not borrow. The result of his disinterest would be lesser investment in the economy, which would also mean, by extension, lesser economic activities.

Policymakers everywhere keep an eye on how to put the available resources at work. But if the price of a vital input like capital remains high, the other inputs cannot be put to work.

Entrepreneurship is crucial in invigorating economic activities. For entrepreneurs capital is the most important input that has to be deployed to make the other collaborative inputs operational. 

An economy by itself does not attain its full potential. It needs to have the required policy support and big pushes, initially through initiatives from the government. Once an economy can ride on a fast moving track, then the rest can be achieved on its own.

For the Bangladesh economy, if it wants to put all its available resources at work, an accelerated rate of investment will be needed. Only then can the economy tide over adverse conditions that tend to keep it down. For attracting investment at a higher rate, a lower interest rate or lower cost of borrowing is an imperative. But cost of borrowing or the interest rate does not automatically come down in the market, especially in markets like that of Bangladesh.

Normally, the interest rate should be determined by the forces of demand and supply - the more the supply of loanable funds, the less should be the interest rate. But in Bangladesh, though the banking industry has excess liquidity or idle fund, the interest rates do not come down through the dynamics of demand and supply for loanable funds. It means the market for loanable funds is not competitive. Some kind of oligopoly or collusive nexus exists here among the banks, which prevents the free interaction of demand and supply for the funds.

Most of the banks in Bangladesh economy are carrying the burden of huge bad loans that have piled up in their balance sheets over the years. The bankers take these into account while fixing the interest rates. In other words, it means the cost of defaulted loans is factored into the cost of funds by the bankers, and then transferred to the new borrowers. Unless the problem of piled-up bad loans is solved, Bangladesh economy cannot hope to have the desired low rate of interest.

The Bangladesh Bank is the regulator of banks and also of the money market. It bears the prime responsibility of bringing down the interest rate in the economy. There should be a change in the monetary policy of Bangladesh Bank in order to help the interest rate go down in the real market. The policy rates like the repos & reverse repos need to be adjusted downward to influence the bringing down of interest rates in the marketplace.

The budget proposal for reducing the corporate income tax by 2.5 per cent for the banks and non-bank financial institutions may not help the cause of lowering the lending rates, in the absence of resolution of the problem of an ever-increasing volume of non-performing loans (NPLs). This proposal, if approved by parliament, may only help the bank owners and their collusive borrowers in perpetuating the loan default culture.

Abu Ahmed is Professor of Economics at the University of Dhaka.

abuahmedecon@yahoo.com

Share if you like

Filter By Topic