The magic of single digit rates

Mahmudur Rahman | Published: June 23, 2018 21:56:57 | Updated: June 24, 2018 20:44:28

One can be forgiven for having grave misgivings at the fanfare with which the government and banks announced that interest rates for loans would be reverted to single digits. Belying competition laws, the banks have 'agreed' to bring loans down to a maximum of 9.0 per cent. There will be a drop in rates for deposits though existing loan agreements are usually honoured. This isn't usual and the government has in principle agreed on anywhere between Tk 10-25 billion reduced revenue from adjusting corporation tax. Making a brave face of it the National Board of Revenue (NBR) has made it clear it will only lower corporation tax provided there is evidence of interest rates going down. It brings up the rather interesting debate on the spread - the difference between rates paid for deposits and that for loans. On a more philosophical note if such intervention is possible in rates why not in hauling defaulters to task.

Leading the pack was Islami Bank, that smooth running organisation that saw shares changing hands in dubious circumstances. It is unlikely the bank will remain one of the well performing banks in Asia this year. While taking the lead in lowering interest rates, the bank will have to figure out how to balance the profit sharing Mudarraba process.

Governments have to go by indicators and they chose inflation as the peg above which interest on deposits are to be made. Analysts have already popped the question whether depositors' confidence will hold or break. That which is considered fair by the government may not necessarily satisfy depositors in the face of taxation on interest outweighing inflation. The doubts about non-banking financial institutions joining the 'huddle' are dark and heavy and their current debts are already high. In effect, forced capping of interest reduces competitiveness and encourages inefficiency. If, after such a high spread (anywhere between 2-7 per cent) and the massive loan defaults  banks are making good money discipline rather than incentivising senselessness should have been encouraged. This suggests capital shortfall will be made up and the big holes smoothed over.

It could well be that some business houses will be strong-armed into taking fresh loans to make the process look good. It's a bluff that the government might want to keep a look out for. Business houses have referred to interest and infrastructure as being the major hindrances on way to fresh investment. Although significant improvements have been made, power and communications still have some way to go to keep pace with growing demand as well as new requirements.

The depositor will have to work out the math. The options are four: fixed deposit receipt (FDR), bonds, share market or simply smuggle out. It might sound awful but that's what's happening in other cases.

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