Lending rates unlikely to rise in near future: BB

FE Team | Published: July 29, 2007 00:00:00 | Updated: February 01, 2018 00:00:00

Siddique Islam
The Bangladesh Bank says the lending rates are unlikely to rise in the near future despite its pursuit of a tight monetary policy to prevent inflationary pressure on the economy.
The central bank officials do not see any possibility of a hike in lending rates saying it will depend on overall economic situation.
They, however, hinted that the interest rates on government-approved securities like treasury bills might increase to mop up excess liquidity from the banking system.
"We want to reduce gap between the interest rates on short-term securities and those on long-term government bonds through changing their interest rates," a senior official of the Bangladesh Bank (BB) told the FE Saturday.
The BB might increase the interest rates on short-term monetary instruments to attract banks and non-banking financial institutions (NBFIs) for investment in them, he added.
"We will strengthen our efforts to persuade the commercial bank for reduction in the spread between lending and deposit rates through improving their efficiencies, and not by hiking lending raters," another BB senior official told the FE.
The central bank cannot dictate the banks directly for re-fixing their interest rates on lending and deposits in a market-oriented economy, he noted.
The BB has been continuing to pursue cautious, restrained monetary policies since the second half of 2005 with a view to curbing the inflationary pressures on the national economy.
"In order to dampen inflationary expectation, it may be prudent to reduce the gap. This may be done by changing to short-term interest rates and developing secondary market of the government securities leading to lowering of yield on long term bonds," the BB said in its fourth monetary policy, released recently.
However, in adjusting short-term rates one has to be careful in view of the fact that due to the present situation of excess liquidity with the banks, the BB may be able to withdraw surplus funds through reverse repo offering relatively higher rate of interest, the monetary policy stated.
On the other hand, the commercial bank officials acknowledged that the lending rates would not increase if the policy-related interest rates rose because of low demand for credit.
"There is little possibility of an increase in the interest rates on lending due to lower demand for credit," a senior official of a private commercial bank told the FE Saturday.
He also said the cost of fund of the banks may decline slightly if the central bank increases the interest rates on short-term monetary instruments like treasury bills.
Currently, four types of treasury bills (T-bills) are being transacted through auctions as monetary tools to adjust the government borrowing from the banking system.
The T-bills have 28-day, 91-day, 182-day and 364-day maturity periods.
Besides, Bangladesh Bank Bills are used as monetary tools as part of its monetary policy.
The country's banking sector, however, experienced a declining trend in interest rates on deposits in the current month while the lending rates remained almost unchanged.
At least five commercial banks reduced their deposit rates while four banks raised the same this month, official sources said.
The commercial banks have already slashed their deposit rates ranging between 0.25 per cent and 1.00 per cent apparently to discourage deposits in a liquid market.
The banks have reduced their deposit rates for specific tenures, such as three months, six months and one-year fixed deposit schemes.
"The declining trend in interest rates on deposits may continue in the coming months because of the low demand for credits," the commercial bank official observed.
Currently, the banks offer different rates of interest on fixed deposit schemes ranging between 5.50 per cent and 12.50 per cent, sources in the central bank said.
Besides, some banks offer interest rates on savings deposit ranging between 2.50 per cent and 7.50 per cent to attract more funds from the general depositors.
However, only two commercial banks, out of 48, raised their lending rates by an additional 1.0 per cent while three banks cut the same with effect from early this month to keep pace with their cost of funds.
According to the BB's statistics, the banks have set their lending rate on working capital between 10 per cent and 16 per cent while export credit is offered at seven per cent.
The banks, however, offer their rates on large and medium scale lending ranging between 10 per cent and 16 per cent, sources said, adding that they charged interest on credit to small industries between 10.00 per cent and 22.50 per cent.
The banks also set their lending rates on housing loans between 10.00 per cent and 16.00 per cent while they offer consumer credits between 10.50 per cent and 19.50 per cent rate of interest.