Existing bank interest rates on deposits and advances (the term loans and advances are used here interchangeably) hardly satisfy the interests of 99 per cent of depositors and the majority of the banks. They ought to be refixed afresh to protect the depositors and the banks from being aggrieved further. What is the alternative solution when the market mechanism fails to set bank interest rates ? The simple answer to the question is the administrative decision to be taken by the government or the central bank, and by the banks under the guidance of the central bank. Have we been so far observing anything else? Obviously not, as the practices provide the evidence. However, that the market would function freely is totally inconceivable in our context. Hence, we cannot but depend on the administered approach to setting interest rates.
Bangladesh Bank instructed the banks to decrease spread, to increase managerial efficiency including recovery of defaulted loan, but not to decrease interest rate on deposits so that downward trend in lending rate are maintained (BRPD Circular No.1 dated07.02.17).While fixing the highest lending rate at 9 per cent (BRPD Circular No.3 dated 24.02.20), the Bangladesh Bank argued that higher interest rate on advances leads to a rise in production cost of borrowing entities, a fall in competitiveness in marketing products and services, inability to repay loan dues in time (in some cases), disruption to credit discipline, and impediment to economic development.
Bangladesh Bank's recent circular (BRPD Circular No.17 dated 08.08.21) explained the context that excessive reduction in interest on fixed deposit affects savings propensity, which (if continued) would adversely affect bank deposit, and also imbalance Asset-Liability Management ( ALM). So, the banks have been instructed to set deposit rate not below the rate of inflation on certain terms and conditions whereas the rate of interest / profit on loan / investment would remain unchanged at a maximum of 9 per cent.
Despite instructions through the circulars, most of the banks further decreased interest rates on both deposits and advances indiscriminately. The central bank had remained silent until the issuance of BRPD circular No.17 (dated 08.08.2021).The single-digit structure of interest rate of 6 to 9 per cent was put into effect from April 1, 2020. Maximum limit of lending interest was fixed at 9 per cent as per BRPD Circular No.3 dated 24.02.20 but the Bangladesh Bank said nothing about lower or higher limit of deposit interest.
Is it quite illogical to raise the lending rates? Working capital loan is directly related to cost of production. According to the operating cycle of a manufacturing firm, working capital is recycled at least three times a year on an average, and interest cost of loan is charged to total working capital ( recycled). Besides this, working capital loan amount is usually determined after provision for borrower's equity portion and the amount of trade credit as well as advances from customers (if obtained). As a result, the effective interest cost percentage may come down to at least one-third of the bank lending rate. Empirical studies on interest cost impact on production cost and loan repayment capacity of the borrowing firm should be carried out with due emphasis before strictly adhering to maximum 9 per cent lending rate.
Did the double-digit lending interest rate significantly affect economic development? Observation is that GDP has been growing gradually at an increasing rate more than 6 per cent since 2010-11 and the latest growth rate reached 8.15 per cent in FY 2019 (upto pre-COVID fiscal year). During the aforesaid period, the weighted average interest on advances ranged from 10.50 to 12.85 per cent. Top management authourities of the banks seem not equipped with sufficient analytical data on their operations to convince the regulatory body regarding interest rates or intermediation spread.
The aforesaid circulars reveal that the central bank realises the sufferings of the depositors on the one hand, and also advocates for lowering or maintaining downward trend in the lending rate. The inevitable consequence of such conflicting instructions is the shrinking spread for intermediation function. My article published in the Financial Express on 17.08.2021 mentioned that 55 per cent of the banks earned a spread of 3 per cent and above while 45 per cent of the banks had a spread of minus figure to less than 3 per cent. However, 31.67 per cent of the banks gained a higher level of spread (4 to 6.77 per cent). We are not aware of how much spread helps a bank to operate with a minimum level of risk-adjusted profitability. Has the central bank carried out any study on the relationship between spread size and profitability of the banks? If not, how far is it justifiable to exert pressure on the banks? The basic question is: whose interest do we prefer most?
Undoubtedly, the way to resetting the interest rates is thorny. The influence of the most influential interest groups may not welcome any administrative decision regarding any sort of upward revision of lending rate in particular. The government may clarify its own stance on rejecting dogmatism of the forces resisting and on accepting pragmatism to protect the interests of all the parties concerned. The Bangladesh Bank's instruction to revise only deposit rates in view of inflation is quite one-sided, inconsistent, and incomplete. This would rather intensify the lending banks' vulnerability. As a result, we desire a reshuffle in the current rates allowing for a reasonable spread but rates would be weighted averages with a maximum limit in individual type of loans and deposits.
As per Scheduled Banks Statistics, January-March 2021, the private sector deposits make up 82 per cent while the rest is held by the public sector. Individual customers (deposit up to 1 crore ) and small businesses together hold at least 67 per cent of private sector deposits. This category of depositors merits consideration in case of determining a minimum reasonable rate of interest on deposits, both fixed and savings. Unfortunately, they have so far been subjected to gradual deprivation in terms of return on their deposits. Interest rate above the rate of inflation as instructed by the central bank would lessen the degree of those depositors' being deprived to some extent. However, a lot more needs to be done for the depositors.
We can hardly protect our economy if we fail to protect at least each of the three parties-- depositors, borrowers, and the banks. With that end in view, a proposed outline for fixing interest rates (weighted basis : 6 to 10 per cent) has been presented in Table 1 and Table 2 tentatively considering the prevailing mix of deposits as well as advances. Effective and democratic dialogue among the banks, representatives of depositors and borrowers, the central bank and the government policy makers are required to rethink and to revamp current interest rates to ensure maximum possible benefits to all stakeholders of the banking industry.
Haradhan Sarker, PhD, is ex-Financial Analyst, Sonali Bank & retired Professor of Management.