Bank lending cap being lifted

Bank lending cap is being lifted as Bangladesh Bank finally decides to undo the crisis-time measure, to give a much-coveted profitability raise to bankers, sources said.

Bankers were lamenting that inflationary pressure on their earnings was eroding their profit margins for operating within two fixed interest brackets: rates on loans given by banks and on deposits they take from people.

Instead of the lending-rate capping at 9.0 per cent, which was imposed in April 2020, the central bank will fix a market-based reference rate under the interest rate-corridor mechanism for the banks to fix the lending rate based on the benchmark rate, the BB sources said.

The decision comes from the 58th meeting of the monetary policy committee, held at the BB headquarters Sunday with BB governor Abdur Rouf Talukder presiding, which also decided on calculating forex reserves as per IMF arithmetic.

The meeting also made two more important decisions: starting monetary policy-modernisation framework under which the interest rate- policy corridor will be made, and calculation of foreign-exchange reserves in accordance with the sixth edition of the IMF's Balance of Payments and International Investment Position Manual (BPM6).

And the decisions will be reflected in the upcoming half-yearly monetary policy statement (MPS) that will be announced in the third week of June 2023, the BB sources said.

Seeking anonymity, a BB official said the monetary policy committee in its meeting Sunday did stocktaking of the country's latest overall macroeconomic situation. Based on the discussions, the central bank adopted three decisions that will be reflected in the coming monetary policy statement.

The decisions are (1) introducing interest-rate-policy corridor under the monetary policy-modernisation-policy framework (2) the phasing out of the existing lending-rate ceiling and (3) calculation of forex reserves as per the BMP6.

"And these will be incorporated into the next MPS scheduled to be announced in the third week of June 2023," the BB official said.

Under the latest decision, the existing lending-rate cap will be withdrawn and the BB will set a market-based reference rate for banks to fix the lending rates based on the reference rate, according to the BB official.

Also, the central bank will release reserve data based on the calculation formula of 6th version of the BPM alongside the existing data.

It means the BB will have to exclude the EDF (export development fund) figure, reserve liabilities, deposits with the state banks from the country's gross reserve figure, which was US$ 31.204 billion as on March 16, 2023.

Bankers and economists hail the decisions, saying that it would give some sorts of respite to the banks which saw drastic fall in their profitability due mainly to the lending cap.

"The decision on lifting the lending-rate cap is definitely a good one. We welcome it," Managing Director and Chief Executive Officer of Mutual Trust Bank (MTB) Limited Syed Mahbubur Rahman told the FE.

He noted that the central bank imposed the cap in April 2020 when there was enough excess liquidity--amid contraction of economic activity for the pandemic--and there was a need to push liquidity into the market.

But things changed now as there is liquidity tightness while the deposit rate increases to around 7.50 per cent, following relaxation of the 6.0-precent cap, but the lending remained capped at 9.0 per cent. As a result, the interest-rate spread keeps squeezing and thus hurting the profitability of the banks, he said.

"But we don't know how the reference rate will be fixed, which is important. It will be good for the banks, we will implement the decision as quickly as possible," he added.

When contacted, professor of Independent University, Bangladesh M. A. Taslim said the decision on phasing out the cap on lending rate should have been taken much earlier as it caused inconsistency between demand and supply.

Since the rate was capped, he said, the demand for credits has gone higher than that for the supply. As a result, the large borrowers or borrowers who have good relation with the banks got more access to credit while the access of the ordinary clients is getting squeezed.

It also hurt the depositors who keep losing their money as the return on their investment is below the inflationary rate, he said.

"I think the decision, though belated, will give some relief to the banks," the country's noted economist said.

About the reserve calculation in the IMF-prescribed formula, he said with this calculation people will get actual picture about the size of stock of foreign currencies to support the BoP (balance of payments).

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