Editorial
Higher lending rates
A pressing concern to address in earnest
The central bank having lifted 13 percent cap on lending rates on January 4, commercial banks have been raising interest charges on credits to new and old customers, rather too freely. These now range between 15.5 and 19-20 percent depending upon the types of loans -- for export, commodity import, on term basis and as working capital for industries. Quite clearly such credits are crucial for turning the wheels of the economy.
The cap was imposed on the lending rate as a cushion for businesses in the face of severe global financial crisis in 2007-08. That was a right step to take at that time. And, it was withdrawn 6-7 months back, again in a rather compelling circumstance. When the inflation went past the double digit the cap on lending rates could hold little meaning.
Nevertheless, the commercial banks charging 19-20 percent as interest on loans is putting strain on the businesses in various ways. The high cost of lending is denuding competitiveness particularly for exports which are dependent on equally costly import of raw materials. It can also induce loan default, a possible fall-out Bangladesh Bank needs to place on its radar.
It is argued higher deposit rates are pushing up lending rates. Still, the spread between interest payable on deposits and that being charged on loans is wide, between 5 and 6 percent. Ideally, the spread should have been 2-3 percent, according to an esteemed economist.
In this context, we think that the Association of Bankers, Bangladesh's formula should merit consideration. This forum of banks' chief executive officers 'had agreed in principle that no bank would offer more than 12.5 percent for deposits and 15 percent for term loans'. But this is not followed by all banks, so regrets a highly placed banker.
To ease off the high lending costs locally, some businesses have opted for funds from abroad. Such a step can be allowed only in the export sector given the obvious advantage of transactions there. But in non-tradable sectors foreign lending would lead to currency mismatch negatively impacting the overall external sector.
Our hope is that a balanced approach would be adopted to the overall lending and deposit scenarios. A consultative process involving all major stake holders is expected to ensue.
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