Commercial banks are rendering dedicated services to the customer for generating profit. The principal functions of a bank are to collect deposit from surplus portion (i.e. from depositors) and supply the collected fund to the deficit portion (i.e. to the loanee). Banks simply play the role of media for fund management with full trust and by adding a certain interest. So, banks borrow money from the public with a stipulated interest rate for supplying it to the loanee.
Usually, banks provide the fund to the customer by disbursement of various types of loans with a predetermined interest rate. Interest rate is the amount paid to the investor for use of money or fund. Generally, lending interest rate is determined by adding operating expenses and profit margin with borrowing rate from public. The added portion is commonly known as spread. So, spread for a bank is the difference between the rates of lending and borrowing. Earlier there was a directive of Bangladesh Bank that spread should not be higher than 5 per cent, but now spread is re-fixed as maximum 4 per cent.Prime Minister Sheikh Hasina dictated to cut down the interest rate to single digit in order to create an industry-friendly environment, new entrepreneurs, generate employment, and foster banking services to the people and also to accelerate trade. In this context, both public and private banks have decided to lower the lending rates to single digit from July 1, 2018. But the single digit interest rate is not yet implemented by all banks to all the customers.
Before implementation of single digit, private banks lending rates were 10 per cent to 15 per cent whereas, the deposit rates were 6 per cent to 11 per cent. Generally, banks provide higher deposit rate to fixed deposit and scheme deposits which is not changeable before the maturity of the said deposit. So, banks are not in a position to cut down the existing term deposit rate instantly. The banks can take fresh deposit at lower rate which reflects slightly in the cost of fund calculation. Most of the cases it is observed that the costs of fund of different banks are very close to the end of single digit. So, banks are not able to bring down cost of fund instantly. Whereas, lending interest rate largely depend on cost of fund.
A number of meetings were held among the different stakeholders for fixation of deposit rates of deposit and loans. As per the decision of the meeting, the rate of loan is fixed at 9 per cent and rate of deposit at 6 per cent, which is slightly higher than the inflation rate of 5.80 per cent. But this rate is still not attractive for the customers since many insurance companies and leasing company offer deposit rate more than 12 per cent. Even this rate is exact half of government borrowing rate from the public through different modes.At the time of investment, the depositors prefer sanchayapatra, postal savings certificate and other government bonds for having attractive interest rate of more than 12 per cent. As a consequence, the bank’s deposits are in declining trend as Bangladesh Bank data exhibits. Depositors have withdrawn nearly a thousand crore taka between December last year and March 2018. The total deposit in December 2017 was Tk. 9,26,179 crore but at the end of March this year the amount stood at Tk. 9,25,279 crore.
However, government takes some initiative for increasing deposits of private commercial banks. Earlier, government fund could deposit upto 25 per cent in private bank but now it is raised to 50 per cent by issuing notice by the government. The government also decided to inject Tk.10,000 crore by slashing the Cash Reserve Ratio (CRR) by one per cent to tackle liquidity crisis and handle the unrest of the economy.
The banking sector of Bangladesh faces liquidity crisis from the beginning of the year when central bank bring down Advance Deposit (AD) Ratio by 1.5 per cent for conventional banks and 1 per cent for Islamic banks. To adjust the ADR banks have to increase deposit by more than Tk.11000 crore by December, 2018. Moreover, incident of Farmers Bank destroyed the faith of the customers towards private banks. Government agencies are now reluctant to deposit their official fund in private banks. They think that these banks are not able to pay the deposit instantly at the time of urgent need. Meanwhile, they have already withdrawn a significant amount of deposit from private banks.
At present, the decision of keeping lending rate at 9 per cent and deposit rate at 6 per cent by implying only 3 per cent spread appears to be an unrealistic one. Bangladesh Bank data shows that the spread has ranged between a minimum of 4.37 per cent to maximum 4.84 per cent over last two years. The spread appears relatively high for the large amount of non-performing loans (NPL). The total NPL of our country is Tk. 88,589 crore in March, 2018, which is 10.78 per cent of the total loan. This percentage is higher than most of the countries of Asia and even the countries of the world. The fixation of minimum spread without reducing the NPL may affect adversely on this sector.
Single digit lending rate is a long cherished demand of the investors or loan takers. In fact, it fosters the economic growth of the country. A country cannot rapidly develop without investment friendly economy. It is one of the pre-requisites of investment friendly economy. To settle the lending rate of all types of loan in single digit the government should take steps to keep the deposit rate of all sector i.e. government deposit collection, leasing company, insurance company and other deposit receiver within 6 per cent, otherwise it would not be implemented universally and uniformly. It would be lying only on policies, papers and discussions. We want a true investment friendly economy for rapid industrialisation with a view to establishing remarkable position of our country in developing countries forum.
The writer is a Banker & Researcher