Lending rate cut
Friday, 10 April 2009
Mohammad Ataul Hoque
IN an instant reaction to the directive by the central bank to cap the lending rate at 13% the Bankers Association of Bangladesh (BAB) Chairman threatened the measure would reflect in the reduction of the deposit rates by the commercial banks, as what he said the public deposit was the "only" source of their funds. I consider the remark made was unfortunate, incorrect and not in the spirit of the honest intention of the central bank.
He made such a remark only to divert public opinion from the main issue and which was made from a very narrow angle of commercial interest only ignoring national interest. Instead of accepting the challenge gracefully to augment investment, he preferred to offer his counter strategy to offset the spirit of the move. Apart from the public deposits the lion's share of the rest of the banks' fund comes from the free money in the form of cash in transit, current accounts, interbank transactions, foreign exchange transactions, incomes from fees and commissions etcetera. Besides, banks' large amounts of low cost deposit from the government also form a significant part of their total fund, in addition to other large amount of hidden low cost funds available to them. After all what is the percentage of public deposit in the total kitty of the bank fund at any point of time? Although the correct statistics is available to the central bank, this would not exceed thirty per cent under any circumstances and to the foreign banks this is even lesser. Therefore, citing the example of deposit rate as the only "raw material' for the bank's "finished product" of lending cost does not hold good.
After all what is their cost of fund, which could be certainly not more than eight per cent of the total cost component, which is even lesser to the foreign banks and perhaps knowing that well the central bank has now imposed the ceiling. Otherwise how year after year each of the commercial banks could make exorbitant profits (super profit), ranging from three billion takas to four billion takas a year at the cost of the national economy only to benefit a handful of shareholders. Yes, due to imposition of the cap -- visa-a-vis current deposit rate -- their spread would be affected to a certain extent. But to what extent that would lead to depletion of their profit could be found out in future only.
But are they justified to make such large super profit despite the fact that a sizeable amount of their total fund comprises of public money? Deposit rate is a matter of public concern as public -- specially the retired people who live on their income from savings out of such deposits. Therefore, drastic cut in the rate, perhaps would lead to public commotion which perhaps, as evident from BAB Chairman's remark , the banks would like to cash in their defence against imposition of the ceiling to maintain their yawning spread.
Fortunately, the avenues for safe deposits at attractive rates would also be available to the public in other financial institutions who are permitted to accept deposit by the central bank. So under the scenario of a free-economy, commercial banks are not the only source for the public to keep their deposits, rather other financial institutions perhaps are in a better position to extend better service to the depositors. So, in case of drastic cut by the commercial banks, the public has the option to fall back on other financial institutions offering the same facility.
Therefore, in trying to hoodwink public against the latest move by using deposit rate is a ploy by the banks to perpetuate their hunger for super profits which the same banks of the country have been enjoying so far. That is an undesirable attempt by the interested quarters. We congratulate the present overwhelmingly elected democratic government for taking such a bold step which its predecessors failed to take mainly due to strong lobbying from the powerful banking sector. To bring the lending rate in line with that of other countries, specially our neighbours is the cry of the day to lead the country towards industrial development. Our only request to the central bank would be to strictly ensure compliance of their directive with effect from the date of the announcement not only for the new loan but also for the existing loan. Otherwise the commercial banks would try to delay or even deny the implementation to the borrowers with one excuse or another as seen the past.
IN an instant reaction to the directive by the central bank to cap the lending rate at 13% the Bankers Association of Bangladesh (BAB) Chairman threatened the measure would reflect in the reduction of the deposit rates by the commercial banks, as what he said the public deposit was the "only" source of their funds. I consider the remark made was unfortunate, incorrect and not in the spirit of the honest intention of the central bank.
He made such a remark only to divert public opinion from the main issue and which was made from a very narrow angle of commercial interest only ignoring national interest. Instead of accepting the challenge gracefully to augment investment, he preferred to offer his counter strategy to offset the spirit of the move. Apart from the public deposits the lion's share of the rest of the banks' fund comes from the free money in the form of cash in transit, current accounts, interbank transactions, foreign exchange transactions, incomes from fees and commissions etcetera. Besides, banks' large amounts of low cost deposit from the government also form a significant part of their total fund, in addition to other large amount of hidden low cost funds available to them. After all what is the percentage of public deposit in the total kitty of the bank fund at any point of time? Although the correct statistics is available to the central bank, this would not exceed thirty per cent under any circumstances and to the foreign banks this is even lesser. Therefore, citing the example of deposit rate as the only "raw material' for the bank's "finished product" of lending cost does not hold good.
After all what is their cost of fund, which could be certainly not more than eight per cent of the total cost component, which is even lesser to the foreign banks and perhaps knowing that well the central bank has now imposed the ceiling. Otherwise how year after year each of the commercial banks could make exorbitant profits (super profit), ranging from three billion takas to four billion takas a year at the cost of the national economy only to benefit a handful of shareholders. Yes, due to imposition of the cap -- visa-a-vis current deposit rate -- their spread would be affected to a certain extent. But to what extent that would lead to depletion of their profit could be found out in future only.
But are they justified to make such large super profit despite the fact that a sizeable amount of their total fund comprises of public money? Deposit rate is a matter of public concern as public -- specially the retired people who live on their income from savings out of such deposits. Therefore, drastic cut in the rate, perhaps would lead to public commotion which perhaps, as evident from BAB Chairman's remark , the banks would like to cash in their defence against imposition of the ceiling to maintain their yawning spread.
Fortunately, the avenues for safe deposits at attractive rates would also be available to the public in other financial institutions who are permitted to accept deposit by the central bank. So under the scenario of a free-economy, commercial banks are not the only source for the public to keep their deposits, rather other financial institutions perhaps are in a better position to extend better service to the depositors. So, in case of drastic cut by the commercial banks, the public has the option to fall back on other financial institutions offering the same facility.
Therefore, in trying to hoodwink public against the latest move by using deposit rate is a ploy by the banks to perpetuate their hunger for super profits which the same banks of the country have been enjoying so far. That is an undesirable attempt by the interested quarters. We congratulate the present overwhelmingly elected democratic government for taking such a bold step which its predecessors failed to take mainly due to strong lobbying from the powerful banking sector. To bring the lending rate in line with that of other countries, specially our neighbours is the cry of the day to lead the country towards industrial development. Our only request to the central bank would be to strictly ensure compliance of their directive with effect from the date of the announcement not only for the new loan but also for the existing loan. Otherwise the commercial banks would try to delay or even deny the implementation to the borrowers with one excuse or another as seen the past.