Bangladesh Bank plans to lift the 9 per cent cap on lending rates amid ongoing talks with the International Monetary Fund and criticism from economists.
The central bank reviews ways to decide whether the interest rate can be increased by sector rather than dissolving the 9 per cent ceiling altogether, reports bdnews24.com.
"A review is underway. Bangladesh Bank reviewed the situation earlier as well, but it has not yet made a decision,” said central bank spokesman Abul Kalam Azad.
Higher-ups in the central bank have also said that they are mulling the possibility of keeping the 9 per cent interest rate cap in the manufacturing sector while dissolving it in other sectors.
In that case, initially, SME and personal loans, which are the loans given against consumer products, may see the rate ceiling go in the first phase.
Bangladesh Bank is also focusing on the impact of dissolving the interest rate ceiling on the economy.
Economic indicators have gone through significant changes after the loan interest rate was capped at 9 per cent in April 2020.
On different occasions, the central bank said the interest rate was capped in a bid to reduce loan defaults and provide loans to traders at a lower interest rate.
The Bangladesh Institute of Bank Management also recommended ending the interest rate ceiling in a keynote paper presented at a conference on August 27.
The monetary policy plans had outlined ways of increasing the currency supply to the market, the BIBM keynote paper said. But as the credit flow slows down due to inflation, the banks will receive fewer repayments and the defaults may pile up further.
“Once the interest rate cap is removed, the entrepreneurs will face a higher cost. In addition, banks will have to bear increased fund management costs. We want to provide loans to the entrepreneurs at a lower cost so the production cost drops,” Bangladesh Bank Governor Abdur Rouf Talukder had told the media at the BIBM event.
Since then, the central bank has not publicly discussed the interest rate ceiling.
The inflation rate was 5.48 per cent in March 2020 before the government fixed the interest rate. It ascended to 9.52 per cent in August this year before easing to 9.10 per cent in September.
Due to soaring consumer prices, depositors at banks are actually sustaining a loss, although the Bangladesh Bank had directed that the interest rate on deposits must be higher than the average rate of inflation.
But the directive has been futile as the deposit interest rate is still around 4 per cent, central bank data indicates.
Economists have been urging the central bank to lift the 9 per cent interest rate ceiling on loans, as well as raising the rate on interest to balance out the crushing pressure of inflation.
Abolishment of the interest rate cap on lending became a key point of discussion amid surging inflation and the International Monetary Fund’s ongoing visit to Bangladesh.
Bangladesh, like many other countries, is facing serious economic challenges due to the impact of the Russia-Ukraine war coming so soon after the pandemic. Major problems, like a fuel crisis, skyrocketing inflation and dwindling foreign reserves are causing headaches.
In response, the Bangladesh government has informed the IMF that it is seeking a loan of $4.5 billion. An IMF team is currently in Bangladesh to discuss the matter. Media reports have indicated that the IMF has set various preconditions for the sizeable loan.
IMF representatives have discussed the interest rate ceiling with the central bank and suggested that the cap be lifted.
In August last year, Bangladesh Bank directed that for deposits of three months or longer, no banks can provide interest to the customer at a rate lower than the rate of inflation.
“The interest rate on deposits cannot be fixed at a lower rate than inflation in any way for deposits by individuals, for private funds of the government and private institutions, post-retirement benefits and other dues,” the central bank said at that time, adding that it will be applicable for individuals if their deposits are for three months or longer.
However, Bangladesh Bank didn’t lift the interest rate cap on lending, apparently protecting the interest of businesses.
