The Monetary Policy Statement (MPS) unveiled on Sunday for the first six months of FY24 will increase the profitability of the lenders as the interest rate spread will widen following the removal of the lending rate cap.
From now on, the lending rate ceiling for banks will be determined by adding a margin up to 3 per cent with the six-month moving average rate of Treasury bills (SMART) while the margin will be 5 per cent for non-bank financial institutions (NBFIs). The reference rate will be made public on the first working day of each month on the website of the Bangladesh Bank.
Banks have seen their profits shrink due to the 9 per cent lending rate cap put in place in April 2020. The cap was set at 11 per cent for NBFIs in July 2022. Until then there was no restriction on NBFIs.
Macro-economic uncertainties stemming from the Russian-Ukraine war intensified the impacts of the restriction and squeezed profits of the lenders further.
For example, IPDC Finance experienced a 93 per cent year-on-year decline in profit after tax in January-March this year as its interest rate spread narrowed to 2.90 per cent from 3.58 per cent.
Many other NBFIs saw erosion in their profits in the last few quarters.
Appreciating the move of the BB, IPDC Managing Director Mominul Islam said, "It's a very scientific and corrective measure, and the system will facilitate the lending operations of non-bank financial institutions".
On the possible rise in profits of NBFIs, he said the interest spread would widen by 1 per cent based on the current moving average rate of 7.17 per cent. "Definitely, the financial institutions will enjoy the benefits of the expanded interest spread."
The IPDC chief, however, said the referral rate should be based on long-term Treasury bills for long-term loans provided by banks and NBFIs.
Managing Director of Eastern Bank Ltd. (EBL) Ali Reza Iftekhar also praised the withdrawal of the lending rate cap, but refused to say if the move would have any positive impact on the bank's profitability.
Following the withdrawal of the lending rate cap, the central bank looks at the possibility of it giving a boost to the bond market.
It said a well-developed capital market could be the source of long-term financing, instead of banks, helping businesses cut down costs.
"The dependency on the banks for the public and private investments creates a maturity mismatch in the financial system," it said in the monetary policy statement.
Bond market development
Usually, banks rely on short-term deposits for long-term financing, which creates the maturity mismatch and puts pressure on liquidity management.
"A developed capital market, especially the bond market, can meet the huge financing requirements for infrastructure development and industrialisation and contribute to the banking system's stability," the BB said.
Investors can improve operational efficiency by borrowing from the bond market at competitive rates. Moreover, the government can finance a significant portion of its budget deficit from the bond market at a lower cost, added the central bank.
The BB instructed NBFIs to explore opportunities to mobilise funds by issuing bonds rather than relying heavily on banks.
It had already allowed all financial institutions to facilitate trading in Sukuk Bonds in the secondary market.
The government has recently made significant modifications in issuing and re-issuing T-bonds to improve secondary market trading of such investment instruments.
The modifications include the introduction of BB's Market Infrastructure (MI) module platform, which is used to settle the transactions of government securities.
The BB has released guidelines on the usage of the MI module platform to help manage secondary trading better. Accordingly, government securities are now transacted in the secondary market through the MI module platform.
Ahsan H Mansur, executive director of Policy Research Institute of Bangladesh, however, said the bond market would not revive unless policy-level changes were brought in.
The government's tendency of borrowing money at lower interest rates is one of the obstacles to the development of the bond market.
"Both the supply and demand sides must be strong for a vibrant bond market. More long-term Treasury bills will have to be issued alongside strengthening the demand side," Mr. Mansur said.
Pension and gratuity funds should be subject to mandatory purchase of bonds along with encouraging private entities to issue bonds.
Manufacturers' worry over cost escalation
Meanwhile, representatives of manufacturing industries said they would face a fund crisis as cost of borrowings would go up for the monetary policy tightening.
The chief advisor to the board of Crown Cement, Masud Khan said many weak manufacturing companies would not be able to access funds from banks.
"The increased exchange rate coupled with higher costs of borrowings will hinder many companies' smooth operations," he added.
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