BAB decision and interest-rate dilemma

Shamsul Huq Zahid | Published: June 21, 2018 22:11:28 | Updated: June 22, 2018 21:46:59

It was not long ago when banks had brought down interest rates on both lending and deposits. None coerced the banks to go for it. They did it at the dictates of the market.

The situation is entirely different now. As the sector is facing an acute shortage of liquidity, banks have upped both lending and deposit rates almost to their previous levels. However, the reasons behind the shortage of liquidity have not been explained clearly until now.

But the reverse trend in the banks' interest rate regime raised concern among businesses on the plea that higher lending rates would increase their cost of doing business.

Moreover, the banking industry is now going through a sort of image crisis due to a number of loan scams and substantial rise in default loans.

The policymakers too became concerned about the overall situation prevailing in the financial sector. A few statements made and actions taken by them amply highlighted their worries involving the developments in the banking sector.

The owners decided to take advantage of the situation. They lobbied hard with the power-that-be to squeeze out some concessions.

The first concession came through the increase in the share of private banks in the deposits coming from the state-owned entities. Earlier, the private banks were entitled to have 25 per cent of such deposits. Lately, it has been raised to 50 per cent.

The central bank---the Bangladesh Bank (BB) -- then came up with another sop. It slashed the repo rate by 75 basis points and cash reserve ratio (CRR) by one percentage point.

All those measures were aimed at beefing up the supply of liquidity in the banking sector.

The owners of private banks wanted more as they pressed the government hard to reduce the tax their banks pay on annual profits. The latter has obliged. The finance minister has proposed a 2.5 per cent cut in corporate tax of banks, non-bank financial institutions and insurance companies.

There is no denying that such a cut is very much justified given the exorbitant rates of corporate tax in Bangladesh. However, the proposal to benefit only banks and financial institutions has triggered a sense of discrimination in other sectors of the economy.

So, the private banks have got enough from the government, it seems. Now it is high time for them to pay back. The decision taken by the Bangladesh Association of Banks (BAB) at a meeting on Wednesday last to reduce both lending and deposit rates to single digit was in line with the desire of the head of the government and also of the central bank.

Identical decision was taken at a meeting, held also on Wednesday last, between the finance minister and the chief executives of the state-owned banks.

It is quite apparent that the head of the government wanted the lending rates on the lower side to help spur business and investment activities in the country. And the bank owners have sought a few concessions to help that desire come true.

But the question is: Will the banks be able to lower both lending and deposit rates under the prevailing circumstances?

Will it be possible for banks to earn profits with interest-spread remaining at 3.0 per cent? The high level of provisioning requirement against classified loans does make things really difficult for the banks.

Experts in the relevant fields have already expressed their scepticism about the viability of the BAB's decision.

But the owners of private banks must have done their homework prior to taking such an important decision. All concerned will be waiting eagerly to see how the banks implement the decision of their owners.

It would be unfair to miss one particular issue that concerns the interest of the depositors.

Will it be justified to offer 6.0 per cent interest on time-deposits and 2.0 to 3.0 per cent on savings deposits when the inflation is around 6.0 per cent?

In such a situation, there is every chance that funds will flow out of banks and become either mattress-money or fly out of the country.

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