The Bangladesh Bank (BB) has set interest rate caps for non-bank financial institutions (NBFIs) on their deposits and lending services in an effort to bring order to the market.
NBFIs will now have the highest deposit celling at 7 per cent and the highest loan celling at 11 per cent.
The central bank took the decision after it found some NBFIs collecting deposits at higher rates, pushing up their cost of funds and in turn their lending rates.
The new limits will take effect on July 1, according to a central bank circular released on Monday.
The instruction, however, will not apply to deposits made prior to the notice.
Bangladesh currently has 34 NBFIs, most of which are in financial trouble, while some are even on the verge of bankruptcy. As such, some NBFIs have been trying to entice new depositors by offering higher interest rates in order to get out of their financial bind.
Such actions raise NBFIs' funding costs and lending rates. This limits the ability of borrowers to repay their debts, which has negative consequences for the economy.
The central bank's ceilings are intended to put an end to this practice.
The BB had previously capped interest rates on loans and deposits of banks, the NBFIs did not have any such caps, allowing them to impose any interest rate on their clients.
In February 2020, the regulator instructed banks to set a maximum 9 per cent interest rate on all loans except credit cards, as part of the government initiative to bring down the lending rate to a single digit.
The single-digit lending rate remains in effect since April 1 of that year.
The Bangladesh Bank’s decision faced huge criticism from both home and abroad, and many said the decision is against the free economy.
After lowering the lending rate, the banking regulator in August last year imposed a cap on banks’ deposit rates as well. The central bank had announced that the interest rate of term deposits must not be less than the inflation rate.
