Banks' lending rates drop

Banks' average lending rate came down to 11.93 percent in March, the lowest in two years, riding on lenders' falling cost of funds and measures aimed at reducing expenditures. 

The fall in lending rates will come as a relief to industries and businesses, who have long described the higher bank interest rates as a key barrier to boosting investment.    

March's average weighted lending rate was more than two percentage points lower than a year ago, when it was 13.73 percent, according to the central bank.  

The deposit rate also went down to 7.06 percent in March from 8.67 percent two years ago. Thanks to the fall in both interest rates and deposit rates, the spread also fell below 5 percent to 4.87 percent in March. 

Bangladesh Bank said the interest rates depend on the banks' cost of funds, operational costs, provisions and profit margins. 

"Banks have rationalised their various services and commissions and cut back on setting up branches and vehicle purchases. As a result, the overall lending rates have fallen," BB said in a statement yesterday. 

Golam Hafiz Ahmed, chief executive of NCC Bank, said his bank has already brought down lending rates for good customers, and has also reduced the interest rates for short-term financing.

At present, banks are free to fix the level and structure of interest rates under the market-based interest rate policy. 

Though the interest rate policy is market-based, Bangladesh Bank often sets the maximum cap for loans in priority sectors keeping in mind the national interests and overall macroeconomic situation. 

For example, the current ceiling on interest rates for pre-shipment export loans is 7 percent and agricultural loan is 11 percent. The effective rate of interest for the Export Development Fund (EDF) is less than 3 percent. 

As of today, Tk 23,500 crore has been financed with the EDF to export-oriented enterprises. 

Around Tk 26,000 crore was disbursed to the buyers' credit sector at 6 percent interest rate. 

The agricultural credit disbursement target for fiscal 2014-15 is Tk 16,000 crore, of which 72 percent has been disbursed during the first nine months of the current fiscal year.    

No more than 10 percent interest rate can be charged under the Bangladesh Bank refinance scheme for SMEs and women entrepreneurs, while a 4 percent rebate rate is applicable for the agriculture sector for cultivation of pulses, oilseeds and spices.

Bangladesh Bank has submitted a proposal to the finance ministry for providing SME loans to dairy farms at a similar rebate rate. 

Businessmen now can borrow loans from foreign sources at lower rates: London Interbank Offer Rate plus 3 to 4 percent, which is less than 5 percent.

Over the last five years, Bangladesh Bank has approved around Tk 500 billion of loans from foreign sources. 

"These low cost EDF, buyers' credit, agricultural credit, SME refinance and foreign loans are significantly contributing towards reducing interest rates in the domestic financial market," said the central bank. 

In recent times, the costs of funds fell gradually over time, but the lending rate did not decline at the same pace as the deposit rate. 

The government also has created a further opportunity in lending rate cuts after it slashed deposit rates on all national savings instruments by around 2 percentage points.

"It would bring down the weighted average lending rate further in the coming days. Bangladesh Bank has been actively working towards reducing the lending rate to a rational level so as to ensure an investment-friendly economic environment," said the central bank. 

Finance Minister AMA Muhith said the cut in savings interest rates would make funds inexpensive for the private sector.

Industries and businesses however want single digit interest rates. 

"If we can bring the banks' lending rates down to a single digit it would help immensely," said Syed Manzur Elahi, a former president of the Metropolitan Chamber of Commerce and Industry in Dhaka, recently.