Dhaka, Bangladesh
NPL upends interest ceiling

NPL upends interest ceiling

News Special A much-vaunted 6-9 percent interest ceiling in banking remains a riddle. Most banks appear to be groping in a dark alley of the interest bracket, mostly finding it difficult to comply with the obligation. Entrepreneurs are saying that the bank rates are still hovering around 11-12 percent and with other charges the figures balloon to 14-15 percent. The government had set July-1st deadline for lowering the deposit rate to 6.0 percent and lending rate to maximum 9.0 percent, reportedly as high cost of funds stymied investment and industrialization and hence affected desired economic growth. But, spot checks show, few could go by the directive for lowering the lending rates to single-digit level as bankers say they cannot make two ends (income and revenue loss on account of interest cuts) meet. Eminent bankers, economists and analysts singled out a villain of the piece that predominantly acts to set all correctives back in the banking sector. And that is NPL or non-performing loan. It's a multidimensional problem. Loan forgeries, insider banking, directed loan, political management appointees, liquidity crisis, capital shortfall, recapitalization, money laundering--all these bad attributes are cited by them in the current state of banking. Another contributor to the high cost of fund they pointed out is high maintenance expenses. Two factors inflate maintenance cost: provisioning of classified loans that are actually NPLs and lavish expenses on account of top managerial manpower. Noted banker Khandker Ibrahim Khaled, a former deputy governor of Bangladesh Bank, presented an anatomy of the conundrum banking affairs and interest rates appear to have been in. He said banks having 2.0 percent classified loans can cut lending rate to single digit but those counting 5.0 percent cannot. "There are even classified loans as high as 10 percent (in some banks)," he said at a live discussion. A questioned cropped up: "Is it possible to set up industries with loans having 11 to 12 percent interest?" The banker suggested the entrepreneurs should with banks for settling the issue interest rates. They cannot count loss, taking high-rated industrial credits, he said. Spread is another catchphrase in banking as a determinant of interest rates and profits of banks. Wider spread between deposit and lending rates determine the margins of profit for banks after maintaining their management and provisioning costs. As it was pointed out that the spread is up to 5.0 to 6.0 percent, Khandker Khaled said, "Classified loans always necessitate high profit for footing the bill for provisioning and maintenance," he said about the secrets of giving lower interest to depositors and charging higher from the borrowers. Tawfiqul Islam Khan, research fellow at the policy-think-tank CPD, suggests the central bank should come up with a work plan on how to implement the interest ceiling. Meanwhile, a BSS report carried views of bankers about the dilemmas over interest cutbacks. It said country's scheduled banks are offering single-digit interest rates for all products, except consumer loans and credit card, to their clients as per the decision of a recent meeting between Finance Minister AMA Muhith and the bank authorities. "As per the decision, each bank is bringing down their interest rates to single digit. Banks are implementing this decision," Secretary General of the Association of Bankers Bangladesh (ABB) M Arfan Ali told the agency Thursday. Recently, Finance Minister AMA Muhith told journalists that the interest rate in the banking sector will come down to single digit from August 9 since the chairmen and the managing directors of the banks agreed to implement the new rate as per the directive of Prime Minister Sheikh Hasina. He said the interest rate for consumer loan and credit card will be flexible as per the banks' obligations. M Arfan Ali, also managing director of Bank Asia Limited, said his bank is working on lowering the lending rate. "The new rate is likely to decrease our bank's income, but we can adjust it by reducing other expenses," he added. He said the single-digit interest rate against bank lending will increase private-sector investment that will help take the country's economic growth to a sustainable level. Chairman of Mercantile Bank Limited (MBL) AKM Shaheed Reza said the MBL board of directors took the initiative from July this year when Bangladesh Association of Banks (BAB) took the decision on the single-digit interest rate. "MBL is disbursing the industrial and corporate loans at single-digit rate from July. For single-digit interest rate, our income has decreased but we adjust the income by reducing other expenses," he added. He said the single-digit interest rate will boost further the country's economy, which will help achieve the country's development goals, including 'Vision-2021' and 'Vision-2041'. NCC Bank Chairman M Nurun Newaz said the board of directors of the bank has already instructed the senior officials to lower the interest rate as per the decision. "Banking sector should bring down the interest rate to a single digit to expedite the country's economy," he added. Bangladesh Bank Chief Spokesperson M Serajul Islam said this is the own decision of the chairmen and managing directors of banks. BB is only providing its ethical pressure on banks to bring down the lending rate to single digit as per their commitment. Earlier, BAB, an association of private commercial banks, at a meeting decided to bring down the lending rate to a single digit and deposit rate for three-month tenure to 6.0 percent from July 1st, the first day of fiscal 2018-19. But, all banks could not implement the decision properly. On the other hand, the government has given incentives, including 5.5 percent CRR, to mitigate their liquidity crisis and bring the interest rate to single digit. The government has also made a decision to allow the state agencies to deposit 50 percent of their funds instead of 25 percent with private banks.

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