Lending rate reduction
Sunday, 30 August 2009
Mohammad Ataul Hoque
LENDING rate is the interest rate at which financial institutes lend money. It constitutes the base from which banks then lend money to the final customers. Prime rate or Prime Lending Rate is a term applied in many countries to a reference interest rate used by banks. The term originally indicated the rate of interest at which banks lent to favoured customers, i.e., those with high credibility, though this is no longer always the case.
The central bank's recent move in our country to fix the maximum ceiling of lending rate and further push to bring down the same to single digit met with stiff resistance from the owners of the banking institutions although hailed by the entrepreneurs and general businessmen who termed the move as need of the hour. The motive behind the resistance of the owners of the banking institutions is profit-oriented disregarding national interest.
Before going into detail let us go through the current World Interest Rate Table below: (Source: Internet)
From the above statistics it appears the lending rate at 13% now fixed by the central bank in Bangladesh is also on the very high side compared to world scenario. Of course due to global recession, the interest rates of major countries have fallen drastically which is not the case here. Yet there is no apparent cause of concern for the banking institutions for raising objections to the central bank's directive to reduce rates. The inflation rate in Bangladesh has fallen nearly to 7.0% which also justifies reduction of interest rate.
To maintain the super profit the banks hitherto been enjoying, they immediately reduced their deposit rates twice in a short period of five months though deposit is not the only segment of their funding sources. Free money constitutes at least 25% of a bank's total fund at any point of time. Therefore, the motive behind targeting deposit rates is mainly to put public and the Government in awkward position rather than bringing any tangible relief towards their funding cost.
Despite the drastic reduction of deposit rates, the yawning gap between the lending rate and the deposit rate is still at more than 5.0% leaving much room to bring further cut in the lending rate without reducing deposit rate any more. A gap of 3.0% is good enough for the banking institutions to maintain their current rate of profitability by reducing unnecessary expenditure and provisioning through better governance. Therefore, single digit interest rate is very much feasible in Bangladesh which undoubtedly would revolutionise the industrial development.
The industrial growth in Bangladesh has been on a downward trend recently resting only with 6.0% growth against 7.0% last year. High lending rates which was 16% plus used to be charged by the lenders before the rate cap had been shying away the entrepreneurs from any new endeavours leading to huge liquidity in the banking channel, a luxury Bangladesh can ill afford.
Let us not think about the profitability only, let us also think about the overall country's development. After all, how much more profit the owners of the lending institutions would want which now ranges from Taka 3.0 to Taka 5.0 billions between one bank and another!
We congratulate Bangladesh Bank Governor for his recent statement urging the country's banks to cut lending rate down to single digit in an effort to boost growth and investment. He further opined the rates should go down to single digit following 2.5% cut in corporate taxes for the country's banks in the current budgets and the interest rate of the banks should reflect that cut. His timely statement echoed demands of the local businessmen who have repeatedly urged the Government and the banks to bring down lending rate to boost sagging private sector investment in the country.
During pre- and immediate post-liberation period, lending rate bands used to be fixed by the central bank. But at a later stage the responsibility was transferred to the lending institutions to decide on the customer/bank relationship on the understanding that the market force would drive a reasonable number in this respect.
But at a later stage it was found the rate was driven not by market force but by profit driven force of the owners of the lending institutions and it became their 'syndicate' decision. Thereafter the investors and the borrowers were left at the mercy of the lending institutions. Bangladesh Bank therefore, might consider again taking over the authority of fixing lending rates to prevent its misuse in future.
The writer can be reached at
e-mail: hoqueataul07@yahoo.com
LENDING rate is the interest rate at which financial institutes lend money. It constitutes the base from which banks then lend money to the final customers. Prime rate or Prime Lending Rate is a term applied in many countries to a reference interest rate used by banks. The term originally indicated the rate of interest at which banks lent to favoured customers, i.e., those with high credibility, though this is no longer always the case.
The central bank's recent move in our country to fix the maximum ceiling of lending rate and further push to bring down the same to single digit met with stiff resistance from the owners of the banking institutions although hailed by the entrepreneurs and general businessmen who termed the move as need of the hour. The motive behind the resistance of the owners of the banking institutions is profit-oriented disregarding national interest.
Before going into detail let us go through the current World Interest Rate Table below: (Source: Internet)
| Central Bank | Current Interest Rate | ||||
| Rate | Rate | Rate | |||
| Bank of Canada | 0.25% | Egypt | 9.0% | Korea | 3% |
| Bank of England | 0.5% | South Africa | 7.0% | New Zealand | 2.5% |
| Bank of Japan | 0.1% | Australia | 3.0% | Taiwan | 1.25% |
| Federal Reserve | 0.25% | China | 5.31% | EU | 1.00% |
| Swiss national Bank | 0.25% | Hong Kong | 0.5% | Sweden | 0.25% |
| The Reserve Bank of Australia | 3% | India | 4.75% | Switzerland | 0.25% |
| Japan | 0.1% | U.K. | 0.5% | ||
| Canada | 0.25% | ||||
| U.S.A | 0.25% | ||||
From the above statistics it appears the lending rate at 13% now fixed by the central bank in Bangladesh is also on the very high side compared to world scenario. Of course due to global recession, the interest rates of major countries have fallen drastically which is not the case here. Yet there is no apparent cause of concern for the banking institutions for raising objections to the central bank's directive to reduce rates. The inflation rate in Bangladesh has fallen nearly to 7.0% which also justifies reduction of interest rate.
To maintain the super profit the banks hitherto been enjoying, they immediately reduced their deposit rates twice in a short period of five months though deposit is not the only segment of their funding sources. Free money constitutes at least 25% of a bank's total fund at any point of time. Therefore, the motive behind targeting deposit rates is mainly to put public and the Government in awkward position rather than bringing any tangible relief towards their funding cost.
Despite the drastic reduction of deposit rates, the yawning gap between the lending rate and the deposit rate is still at more than 5.0% leaving much room to bring further cut in the lending rate without reducing deposit rate any more. A gap of 3.0% is good enough for the banking institutions to maintain their current rate of profitability by reducing unnecessary expenditure and provisioning through better governance. Therefore, single digit interest rate is very much feasible in Bangladesh which undoubtedly would revolutionise the industrial development.
The industrial growth in Bangladesh has been on a downward trend recently resting only with 6.0% growth against 7.0% last year. High lending rates which was 16% plus used to be charged by the lenders before the rate cap had been shying away the entrepreneurs from any new endeavours leading to huge liquidity in the banking channel, a luxury Bangladesh can ill afford.
Let us not think about the profitability only, let us also think about the overall country's development. After all, how much more profit the owners of the lending institutions would want which now ranges from Taka 3.0 to Taka 5.0 billions between one bank and another!
We congratulate Bangladesh Bank Governor for his recent statement urging the country's banks to cut lending rate down to single digit in an effort to boost growth and investment. He further opined the rates should go down to single digit following 2.5% cut in corporate taxes for the country's banks in the current budgets and the interest rate of the banks should reflect that cut. His timely statement echoed demands of the local businessmen who have repeatedly urged the Government and the banks to bring down lending rate to boost sagging private sector investment in the country.
During pre- and immediate post-liberation period, lending rate bands used to be fixed by the central bank. But at a later stage the responsibility was transferred to the lending institutions to decide on the customer/bank relationship on the understanding that the market force would drive a reasonable number in this respect.
But at a later stage it was found the rate was driven not by market force but by profit driven force of the owners of the lending institutions and it became their 'syndicate' decision. Thereafter the investors and the borrowers were left at the mercy of the lending institutions. Bangladesh Bank therefore, might consider again taking over the authority of fixing lending rates to prevent its misuse in future.
The writer can be reached at
e-mail: hoqueataul07@yahoo.com