Lower lending rates to boost economy

22 January, 2020 12:00 AM printer

The government has been very liberal in giving incentives to private banks to lower their lending rates for years. But, it did not happen, as lowering their lending rates will also require lowering the interest rate on deposits. Banks claimed that lowering interest rates might discourage people from saving and bring down the amount of deposits, which will affect their ability to function in a competitive market.

In reality banks have been trying to keep a high net interest spread as they want to make a higher net profit for themselves. The bank’s profit is the net interest spread, which is the difference between the borrowing and the lending rates of banks and financial institutions.

Now the government has given permission to the autonomous, semi-autonomous and state-owned entities to deposit up to 50 per cent of their surplus funds in private banks and non-bank financial institutions, this will reduce some of the fears of banks about losing deposits. Therefore, we now hope that the banks and financial institutions will lower their lending rates for businesses to expand and prosper. If the policy has the desired effect of lowering lending rates, then the economy will flourish and grow having a ripple effect on the nation’s overall development.

It is stated that the autonomous, semi-autonomous and state-owned companies will receive a maximum interest rate of 6 percent on deposits in the private banks. On the other hand, they will receive 5.5 percent interest rate on deposits in the state-owned banks. This may adversely affect the state-owned banks by luring away deposits to the private banks and financial institutions. But the trust people have on state-owned institutions can hopefully help them ride over the tide.

At a time when Prime Minister Sheikh Hasina has embarked upon mega projects, with directives to launch more to take the country to newer heights, it is now the duty of the financial institutions to do the needful. We will closely monitor to see if private banks show their goodwill to the country’s economy by lowering their lending rates after this latest government move. The ball is in their court now!