Banks smarting under SMART interest regime dilemma

Commercial banks look caught up in a quandary in raising the lending rates as per the latest interest-rate corridor called SMART because the existing borrowers stick to repayment at the old rates, bankers say.

On the other side of the banking floor, depositors press for interest hike under the new regime that replaced the 9-6 caps resorted to perforce during crisis time.

However, to the new customers who have signed an agreement over the past five days of this new fiscal year the commercial banks have applied the new lending rates which are barred from going beyond 10.1 per cent as per referrals.

The six-month moving average rate of treasury bills (SMART) for June was 7.10 per cent. In addition to it, maximum of 3.0 per cent can be added in determining the lending rate for banking industry. The non-bank financial institutions can add a maximum of 5.0 per cent on the 7.10. This is variable—it will change every month.

The 9.0-percent lending-rate cap was scrapped with effect from the last day of June. The new variable rate called SMART became effective on July 01 as per the latest monetary policy statement or MPS.

The deposit rates, in the meantime, have also been on an upturn for the last few months as there were speculations on the market that the lending rate of maximum 9.0 per cent would go.

“We have notified our clients to raise the adjusted rates upwards as per the central bank’s latest decision under SMART formula,” says Syed Mahbubur Rahman, managing director and CEO of the privately owned commercial-bank Mutual Trust Bank or MTB.

He adds: “Most customers have also replied negatively…They want to continue their repayments under old rates that do not cross 9.0 per cent.”

Banks and clients usually sign in an agreement for getting loans. Banks usually keep provisions in the agreements about floating rates so that they can adjust it later.

The MTB CEO, however, says they will take a decision next week under such a situation.

On the other hand, another private commercial bank – BRAC Bank, says they are not raising the rates for old customers. But new customers have been brought under the new lending caps.

“Our major clients belong to SMEs. Where small firms are major and the average loan is Tk 1.5 million,” says Md Shaheen Iqbal, a deputy managing director of the BRAC Bank.

“We have signed some deals under the new lending rates over the past few days,” said Mamoon Mahmood Shah, managing director and CEO at the NRB Bank.

They will sit tomorrow (Thursday) for a board meeting on the issue. “The decision on the notification to the customers about the new rate to the customers will begin next week.”

Central bankers who are familiar with the developments told the FE that this (lending and deposit rates) is the full discretion of the banks. Central banks have just given directives.

“Banks can even charge much lower from 10.1 per cent, depending on the bank- client relationships,” said one central banker.

He said the central bank will be aware about the details on new rates and their applications after at least next three months.

In the meantime, a nine-member delegation of the central bank, headed by its chief economist Dr Habibiur Rahman, will visit the Reserve Bank of India or RBI on 10-12 July over the interest-corridor issue.

The RBI or the central bank of India began such a corridor sometime in 2016.

The team will visit the RBI Mumbai HQs where they will get practical experiences about the monetary management with the RBI.

Bangladesh Bank introduced the interest rate targeting formwork from this July for the first time.

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