Balancing implications

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Mahmudur Rahman
And so the much awaited and expected forced rate cuts for bank loans to 13% maximum is now a reality. The business circle is still unhappy and wants this to come down to single digit numbers. Bankers were guarded in their disappointment and Mahmood Sattar, President of their association was careful when he put it across that deposit rates need to come down as well. There lies the dilemma.
Loans for the productive sector were charged at 14.75% rate of interest and above against the deposit rate as high as of plus 13.% on long term fixed deposit receipts (FDRs). Some non-bank financial institutions are paying 13.5% on long terms deposits. All of them must now do a simple bean count on the cost of such high deposit rates. In the meantime, the poor consumer will now know that there is no such relief for their personal loans -- that can go up to as high as 18%. The authorities have long been harping to the tune that consumer loans are unproductive and that liquidity is better utilised in the productive sector despite, the fact that such loans have fueled a significant growth in the consumer-durable market that has in its own way contributed to employment and trade. One understands the government's stand that it would rather see better growth in business and industry than consumer-durable market but there is no denying that this sector too has its merits.
The banks must be in a quandary. Arguably one of the most profitable segments of the economy, they have been successful in raking in deposits through attractive interest rates and the growth of consumer-loans. Apparently, there is a liquidity glut with few big-term loan takers due to the interest rates. Could it be that deposits will now actually be discouraged while the liquidity glut is taken care of and big business placated? Obviously this is just one piece of a much larger puzzle.
Complicating matters is the behaviour of the stock market. Whereas banks were being favourably looked at by investors, last Tuesday's decision had an immediate impact on the markets with the index diving. Stock market analysts found little reason for the rate cuts to have such an impact -- indeed when rates go down, a mature stock market does tend to see a rise in the index. Not so in Bangladesh, specially when individual small-investors see a threat to short-term profits and ignores long-term benefits. Again it boils down to the tightening of belts that has inevitably set in due to the slow-down. Even the good news of a record remittance in March doesn't seem to have had an impact but may well have helped bank liquidity.
Bangladesh has one of the highest interest rates in the region and given the suspicion with which depositors view the state-owned commercial banks, it will take some more time for confidence to be rich enough for more stability. In the meantime it does appear that exports to unfamiliar destinations are now more urgently required to prop up the economy. (The writer is a former Head of Corporate and regulatory affairs, British American Tobacco Company, Bangladesh and Chief Executive Officer of Bangladesh Cricket Board. He can be reached at e-mail: mahmudrahman@gmail.com)