Banks must reduce their lending rate
Thursday, 4 October 2007
ONE area where the government needs to play a very useful role is encouraging new investments in the economy. Investment operations are presently stagnant but the same are likely to get a big boost if the banks substantially lower their lending rate. Government should be more dynamic in persuading the banks to take such decisions.
Existing entrepreneurs or potential ones in the country maintain that they find the lending rates charged on banks' credits as unserviceable. The interest rates vary between 13 and 15 per cent but can be as high as 22 per cent due to the compound manner of interest calculation.
But interest rates on banking loans are 2.0 to 3.0 per cent in the developed countries. Even in other South Asian countries the rates on such loans, on average, are no more than 5.0 per cent in most cases. Thus, it is no surprise that in the Bangladesh context the high cost of funds remains a very serious obstacle to greater entrepreneurship or investments. Investment operations need a kick start, specially under the current depressed investment scenario in the country due to many reasons. This can only happen with a major stimulus such as the one of significant reduction in the lending rate of the banks. Despite some commendable growth of the stock market and other institutional developments in the country's capital market in the recent times, banks still continue to be the major source of funding. Here the high lending rate of banks continues to undermine their role, as the main providers of funds, to the businesses.
The Bangladesh Bank (BB) recently wrote to the commercial banks to make real efforts to push down their lending rate. But this directive is yet to be responded. Here again, one has to consider the deposit rate of the banks and the rate of interest that the government pays on its various savings certificates while taking stock of the lending rate. Calling for lowering the lending rate will hardly make any sense, without taking the inflation rate, deposit rate and rate of return of government savings instruments into consideration. The banks cannot be expected to lower their lending rate below their deposit rate.
Therefore, only urging from the BB for lowering the lending rate will not serve any purpose. If all other factors do that matter for fixing lending rate of the banks are neglected in the process.
Md Khalequzzaman
Babar Road
Mohammadpur
Dhaka
Existing entrepreneurs or potential ones in the country maintain that they find the lending rates charged on banks' credits as unserviceable. The interest rates vary between 13 and 15 per cent but can be as high as 22 per cent due to the compound manner of interest calculation.
But interest rates on banking loans are 2.0 to 3.0 per cent in the developed countries. Even in other South Asian countries the rates on such loans, on average, are no more than 5.0 per cent in most cases. Thus, it is no surprise that in the Bangladesh context the high cost of funds remains a very serious obstacle to greater entrepreneurship or investments. Investment operations need a kick start, specially under the current depressed investment scenario in the country due to many reasons. This can only happen with a major stimulus such as the one of significant reduction in the lending rate of the banks. Despite some commendable growth of the stock market and other institutional developments in the country's capital market in the recent times, banks still continue to be the major source of funding. Here the high lending rate of banks continues to undermine their role, as the main providers of funds, to the businesses.
The Bangladesh Bank (BB) recently wrote to the commercial banks to make real efforts to push down their lending rate. But this directive is yet to be responded. Here again, one has to consider the deposit rate of the banks and the rate of interest that the government pays on its various savings certificates while taking stock of the lending rate. Calling for lowering the lending rate will hardly make any sense, without taking the inflation rate, deposit rate and rate of return of government savings instruments into consideration. The banks cannot be expected to lower their lending rate below their deposit rate.
Therefore, only urging from the BB for lowering the lending rate will not serve any purpose. If all other factors do that matter for fixing lending rate of the banks are neglected in the process.
Md Khalequzzaman
Babar Road
Mohammadpur
Dhaka