Banks follow improper methodology in fixing lending rates, say experts

FE Report | Published: November 09, 2018 09:44:29 | Updated: November 09, 2018 20:05:04


Picture used for illustrative purpose only — Collected

Banks are not methodical in fixing lending and deposit rates, enhancing scope for bad loans and deposit outflow to non-productive sectors, experts have said.

But they follow a quick method of reducing cost of funds by cutting deposit rates instead of addressing factors like enhancing efficiency, reduction in NPLs (non-performing loans) and operating costs.

The experts made the observations at a plenary session on 'Macro Banking Environment' organised by Bangladesh Institute of Bank Management (BIBM) on Thursday.

The BIBM hosted the event as part of its two-day annual banking conference 2018 in its auditorium in the capital's Mirpur area.

The speakers suggested concentrating on governance for raising institutional competitiveness, implementation of the central bank's macro-prudential regulations and fixating inflation rate that influences other rates.

Prof Shibli Rubayat Ul Islam, dean, business studies faculty at Dhaka University, moderated the event.

Five study papers-governance and competitiveness, assessing impact of demonetisation at informal sector in India, effectiveness of macro-prudential regulations in Bangladesh, single-digit interest rate: Bangladesh perspective and stochastic behaviour of inter-bank repo rate in Bangladesh-were also presented.

BIBM Prof Md Nehal Ahmed said there are multiple models like cost-plus pricing and price leadership in the global market to determine lending rates.

"Cost-plus pricing is considered the most scientific models in the world. But we rarely follow it," he said.

Citing a research paper on lending rate, Prof Ahmed said interest rate is much higher in construction (10.56 per cent), consumer financing (11.43 per cent) and SMEs (10.85 per cent) where the NPL is the lowest. But the rate is the lowest in industry (9.06 per cent), term loan (9.44 per cent), working capital (9.20 per cent) and trade and commerce (9.57 per cent), he added.

It reflects that banks try to recover losses made in industry and other sectors, Prof Ahmed mentioned.

"We're actually depriving good clients at the cost of risky clients," he said.

He said the paper also showed that foreign banks rank risk premium after the cost of funds whereas local banks place it after five.

It indicates that local banks are not taking NPLs as a serious factor, Prof Ahmed stated.

Dr Khondaker Golam Moazzem, research director of Centre for Policy Dialogue (CPD), said spread is a key indicator that influences banks to set interest rates.

He said the spread has been hovering around 5.0 per cent for the last one decade or so. Banking has become computerised over the years, thus cutting the costs of dealing loans and other tasks.

"Is the 5.0-per cent spread still justified in this context? There is scope to reduce the rate," said Mr Moazzem of the local think tank.

About inflation, he said the rate never goes below 5.0 per cent in Bangladesh.

When food inflation increases, Mr Moazzem said, non-food inflation decreases or vice versa. It never happens in other developing countries.

"We need to have close understanding of how this inflation rate can be a determinant…," he added.

BIBM supernumerary professor Helal Ahmed Chowdhury said banks have reduced deposit rate far below 6.0 per cent, discouraging depositors.

There is every chance of the outflow of deposits to other non-productive sectors, he opined.

Prof Chowdhury said 58 banks operating in the country are chasing a few clients.

Driven by competition, banks in many cases finance them without proper evaluation of the proposal, he added.

"It's a big threat of growing NPLs. The competition should be healthy," Prof Chowdhury cited.

Bangladesh Bank general manager Md Habibur Rahman, deputy general managers Md Zulkar Nayn and Dr Imam Abu Sayed, and CPD research associate Syed Yusuf Saadat, among others, also spoke.

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