Banks free to fix own lending rates from July

Banks will be free to fix lending rates on their own in keeping with the central-bank set SMART or six-month moving average rate for treasury bills as reference rate from July next.
Officials concerned at the Bangladesh Bank (BB) said the banks could add 3.0 percentage points more in the form of cost of fund and profit margin to the benchmark rate to fix their lending rates.
For example, six months' moving average of 182-day treasury bill is now around 6.98 per cent. With inclusion of 3.0 percentage points, the maximum lending rate comes at around 10 per cent.
The central bank will start to release the SMART rate on its website this month so that the lenders can make necessary preparations to do their banking activities based on the market-driven rates from the upcoming financial year (FY'24), they said.
The move comes soon after the recent BB decision on lifting the existing lending-rate cap at 9.0 per cent, imposed on April 2022 when there was enough excess liquidity in the banking system amid lingering economic-activity slowdown.
Seeking anonymity, a BB official said the regulator later last month decided to use SMART as the benchmark rate under which the banks will fix their rates of lending to their clients.
"Moving average of risk-free investment instruments is one of the most accepted market-based models, which is being considered in making the reference rate for the banks," the official told The Financial Express.
Another BB official has said the central bank plans to update the SMART rate probably from this month on its website that will help the banks update themselves accordingly.
"But it is set to be implemented after announcement of the next MPS (monetary policy statement), scheduled to be unveiled in the third week of June next," the official said, adding that the SMART will be updated early every month.
The issue of reference rate was also widely discussed at Sunday's bankers' meeting where top executives of the country's scheduled banks were keen to know details about the possible benchmark rate. The meeting was chaired by the BB governor Abdur Rouf Talukder.
Talking to the FE, Managing Director and Chief Executive Officer of Pubali Bank Limited (PBL) Mohammad Ali said they were informed about the SMART in the meeting. In this lending-rate-fixation mechanism, banks can add up maximum 3.0 percentage points to the benchmark rate.
He said they need to update many things, including the software and other core banking activities matching the SMART rate.
The six-month moving average of the risk-free investment instrument will be a good option. "At least, we will have choices. Considering social values and economic importance, we can offer comparatively lower rate while we can charge maximum rate for the areas having risk and little importance to the economy. This way we can adjust."
Contacted, Managing Director and Chief Executive Officer of Mutual Trust Bank (MTB) Limited Syed Mahbubur Rahman said it was shared in the meeting that the last 6-month moving average of treasury bill was 6.98 per cent. For example, with that current rate, the maximum lending rate for banks could be 9.98 per cent.
But the exact rate for lending will be known after June seeing the then SMART rate.
"I think this is a good move to start with," the banker says about the transition.
Managing Director and Chief Executive Officer (CEO) of Brac Bank Limited Selim R. F. Hussain says much the same in welcoming the uncapped lending regime. It is not easy to go for a market-based rate in one go. "It needs time and I think the SMART rate is good option to start with. We welcome it."
He also looks forward to market-determined pricing of both for foreign currency and local currency in exchange. "Our aspiration is a fully market-based pricing both for foreign currency and local currency. However, we are very cognizant that this sort of regime must be implemented in careful phases -- and that is exactly what the central bank is doing," he says.

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