Rationalisation of bank interest rate matrix for lending
Saturday, 13 November 2010
The policy of Bangladesh Bank administering directly the interest rates of deposit and lending was abolished through the reforms of the banking system in the past decade.
Lending rates are now influenced by forces driven by market. Inflation, ratio of government borrowings, ROI on deposit and NPL ratio etc form the platform for the market to drive interest rates on lending.
The shift from controlled environment to "open to market" dynamics was an unavoidable necessity to promote institutional creativity and introduce meaningful competition.
But, the core structural issue remained totally unaddressed. As a result, the benefits of opening up could not be infused into the system. It did not reach the majority user beneficiaries of the banking system.
The present structure: The lending interest rates matrix still in vogue was designed by Bangladesh Bank more than two decades ago.
During those days of financial oligopoly the interest rate matrix was presumably designed to fulfil the agenda of the policy makers' interest groups. The agenda was predominantly loan-product focused. In reality this should be realigned and refocused to the market segments with clear segmentation in line with basic structural bifurcation of macro economy.
Deficiencies in the present matrix: The present lending interest rates matrix has been divided into 11 groups with the option to have 2 sub-sections in each.
One group of the matrix is focused on agriculture sub-sector and another is unspecified group (termed as "Others"). The rest nine are primarily product-focused and overlapping to each other. For example, the term 'loan' in small and cottage industry group has a confusingly overlapping juxtaposed relationship with commercial lending group. Traditionally, the term 'loan' is a well-known product for financing to acquire a fixed asset. But this product is also available for financing working capital, especially for SMEs. Another sector is fully dedicated and biased to an intermediary sub-sector (NBFI) having no acceptable economic sense apart from providing a fund support to them for presumably for their regulatory failure (in contrary to Bangladesh Bank license agreement) to mobilise term deposit from general public to fund their own leasing operations.
More interestingly, another section of the lending interest rate matrix is fully kept dedicated to credit card product despite having a second one for consumer credit. Fixation of interest rate for plastic cards and similar other products with basic features in common should come under and within the purview of a generic consumers' unsecured section in line with the broader economic policy requirement to control the demand side of the economy.
The matrix does not support non-traditional export sector: The export financing in the interest rate table has been kept fully inelastic to the demand dynamics of the sector. For diversification of country's export base a few sub-sectors of our non-traditional export require more support than others. After withdrawals of Bangladesh Bank export refinance facility, the fixed interest rate for the entire export sector is conspicuously an antidote to boost the export. Interest rate for export should therefore be made highly elastic. Present regulatory fixed ROI of 7% for export financing is neither meaningful for matured RMG sector (which today may also be termed as a traditional sector like jute) nor justifiably supportive for encouraging non-traditional sub-sector of exporting strawberry fruits, for example.
Bangladesh Bank has taken a few very good initiatives during the past several years to bring discipline and transparency in the banking system. One of those is Anti-Money Laundering move. The foreign exchange reserve of the country has attained a satisfactory level in the recent past. This has been successful because of robust and continuously growing remittances by NRBs through the formal banking channel. NRB remittances have occupied a large share of country's non-traditional export in service sector. And accordingly, their domestic borrowing should fall under export financing as long as the repayment is made out of the foreign remittances. This may, for example, be in home loans, car loans as well as in SME loans for their beneficiaries and for that, the option in lending matrix may be developed.
The narrow swing from mid-rate: The other structural hindrance of the lending interest rate is the narrow swing from the mid-rate. The present swing in each section (excluding export finance) is 1.5 percentage points.
It is hence necessary to widen the swing from mid-rate. This would also encourage the banking system to charge variable interest rates across a wide spectrum of products having different underlying primary securities and business purposes but given to a single obligor falling under a particular sub-segment of the economy.
The basic change: The supply side of the economy is primarily sub-divided into three basic segments of primary, secondary and tertiary economy. Each of these is composed of a number of enterprises and initiatives. The enterprises based on fixed assets and employee sizes are further categorised into five basic sub-groups in the Industrial Policy 2010. These are large, medium, small, micro and cottage.
A matrix of lending rates of interest should be designed to fit this supply side of the enterprises. For each group of enterprises falling in one of the 3 sub-sectors of the economy there should be 2 mid-rates. One is for export and the other for domestic market. The wider swing from mid-rate for each such cluster may also vary; say from 3 to 3.5 percentage points to accommodate a host of obligors with varying characters in each.
Apart from this, farmers engaged in agricultural production and other rural activities, who collectively play an important role in the supply side of the economy, deserve a separate position in the proposed lending rate matrix with preferential rate for them that is set and reset by the Bangladesh Bank from time to time. The farmers do not fit in any of the above five categories as defined by the industrial policy. For them a 6th group may be formed in the matrix. Regulatorily fixed ROI for the farmers' group and similar other priority groups, as and when declared by the Bangladesh Bank, may be placed under this group in the matrix.
Consumers' interest: The ultimate consumers' segment, being collectively the non-productive demand side of the economy, should get a focused and separate attention from the point of view of Monitory Policy intervention from time to time. This warrants to devise an altogether dedicated and independent lending interest rates matrix for better control and manoeuvring of the inflation rate by way of prescribing changes in mid-rates as well as in the swing range from up and down on periodical basis.
The consumers' loans may basically be divided in to two groups. One is secured and the other is unsecured. In each, there can be many products (designed and redesigned), depending on their uses and purposes.
It is estimated that a large amount of consumers' loan may be repaid by NRB remittances and accordingly favourable interest rates may be introduced for them. This may give systemic encouragement to incremental NRB remittances in future.
Uniqueness of the proposed new matrix: The proposed new lending matrix will be fully focused on the economy and market, with a greater degree of flexibility in swing. This will give a huge encouragement to widen the base of the country's export with preferential and differential pricing treatment with local market operators.
The writer is a banker. The views and opinions expressed in this write-up are of the writer's own. He can be reached at bchoudhuri@yahoo.com
Lending rates are now influenced by forces driven by market. Inflation, ratio of government borrowings, ROI on deposit and NPL ratio etc form the platform for the market to drive interest rates on lending.
The shift from controlled environment to "open to market" dynamics was an unavoidable necessity to promote institutional creativity and introduce meaningful competition.
But, the core structural issue remained totally unaddressed. As a result, the benefits of opening up could not be infused into the system. It did not reach the majority user beneficiaries of the banking system.
The present structure: The lending interest rates matrix still in vogue was designed by Bangladesh Bank more than two decades ago.
During those days of financial oligopoly the interest rate matrix was presumably designed to fulfil the agenda of the policy makers' interest groups. The agenda was predominantly loan-product focused. In reality this should be realigned and refocused to the market segments with clear segmentation in line with basic structural bifurcation of macro economy.
Deficiencies in the present matrix: The present lending interest rates matrix has been divided into 11 groups with the option to have 2 sub-sections in each.
One group of the matrix is focused on agriculture sub-sector and another is unspecified group (termed as "Others"). The rest nine are primarily product-focused and overlapping to each other. For example, the term 'loan' in small and cottage industry group has a confusingly overlapping juxtaposed relationship with commercial lending group. Traditionally, the term 'loan' is a well-known product for financing to acquire a fixed asset. But this product is also available for financing working capital, especially for SMEs. Another sector is fully dedicated and biased to an intermediary sub-sector (NBFI) having no acceptable economic sense apart from providing a fund support to them for presumably for their regulatory failure (in contrary to Bangladesh Bank license agreement) to mobilise term deposit from general public to fund their own leasing operations.
More interestingly, another section of the lending interest rate matrix is fully kept dedicated to credit card product despite having a second one for consumer credit. Fixation of interest rate for plastic cards and similar other products with basic features in common should come under and within the purview of a generic consumers' unsecured section in line with the broader economic policy requirement to control the demand side of the economy.
The matrix does not support non-traditional export sector: The export financing in the interest rate table has been kept fully inelastic to the demand dynamics of the sector. For diversification of country's export base a few sub-sectors of our non-traditional export require more support than others. After withdrawals of Bangladesh Bank export refinance facility, the fixed interest rate for the entire export sector is conspicuously an antidote to boost the export. Interest rate for export should therefore be made highly elastic. Present regulatory fixed ROI of 7% for export financing is neither meaningful for matured RMG sector (which today may also be termed as a traditional sector like jute) nor justifiably supportive for encouraging non-traditional sub-sector of exporting strawberry fruits, for example.
Bangladesh Bank has taken a few very good initiatives during the past several years to bring discipline and transparency in the banking system. One of those is Anti-Money Laundering move. The foreign exchange reserve of the country has attained a satisfactory level in the recent past. This has been successful because of robust and continuously growing remittances by NRBs through the formal banking channel. NRB remittances have occupied a large share of country's non-traditional export in service sector. And accordingly, their domestic borrowing should fall under export financing as long as the repayment is made out of the foreign remittances. This may, for example, be in home loans, car loans as well as in SME loans for their beneficiaries and for that, the option in lending matrix may be developed.
The narrow swing from mid-rate: The other structural hindrance of the lending interest rate is the narrow swing from the mid-rate. The present swing in each section (excluding export finance) is 1.5 percentage points.
It is hence necessary to widen the swing from mid-rate. This would also encourage the banking system to charge variable interest rates across a wide spectrum of products having different underlying primary securities and business purposes but given to a single obligor falling under a particular sub-segment of the economy.
The basic change: The supply side of the economy is primarily sub-divided into three basic segments of primary, secondary and tertiary economy. Each of these is composed of a number of enterprises and initiatives. The enterprises based on fixed assets and employee sizes are further categorised into five basic sub-groups in the Industrial Policy 2010. These are large, medium, small, micro and cottage.
A matrix of lending rates of interest should be designed to fit this supply side of the enterprises. For each group of enterprises falling in one of the 3 sub-sectors of the economy there should be 2 mid-rates. One is for export and the other for domestic market. The wider swing from mid-rate for each such cluster may also vary; say from 3 to 3.5 percentage points to accommodate a host of obligors with varying characters in each.
Apart from this, farmers engaged in agricultural production and other rural activities, who collectively play an important role in the supply side of the economy, deserve a separate position in the proposed lending rate matrix with preferential rate for them that is set and reset by the Bangladesh Bank from time to time. The farmers do not fit in any of the above five categories as defined by the industrial policy. For them a 6th group may be formed in the matrix. Regulatorily fixed ROI for the farmers' group and similar other priority groups, as and when declared by the Bangladesh Bank, may be placed under this group in the matrix.
Consumers' interest: The ultimate consumers' segment, being collectively the non-productive demand side of the economy, should get a focused and separate attention from the point of view of Monitory Policy intervention from time to time. This warrants to devise an altogether dedicated and independent lending interest rates matrix for better control and manoeuvring of the inflation rate by way of prescribing changes in mid-rates as well as in the swing range from up and down on periodical basis.
The consumers' loans may basically be divided in to two groups. One is secured and the other is unsecured. In each, there can be many products (designed and redesigned), depending on their uses and purposes.
It is estimated that a large amount of consumers' loan may be repaid by NRB remittances and accordingly favourable interest rates may be introduced for them. This may give systemic encouragement to incremental NRB remittances in future.
Uniqueness of the proposed new matrix: The proposed new lending matrix will be fully focused on the economy and market, with a greater degree of flexibility in swing. This will give a huge encouragement to widen the base of the country's export with preferential and differential pricing treatment with local market operators.
The writer is a banker. The views and opinions expressed in this write-up are of the writer's own. He can be reached at bchoudhuri@yahoo.com