BB to lift consumer loan interest rate cap

The Bangladesh Bank is going to withdraw the interest rate cap on consumer loans after two years and a half, its officials have said seeking anonymity.

The central bank decided in principle to withdraw the interest rate cap on consumer loans only, its officials told The Business Post.

They said lenders would be able to impose interest rates at their own discretion only on consumer loans while that on other loans, including small and medium enterprise (SME) ones, would remain unchanged at 9 per cent.

The banking regulator is going to implement the decision amid soaring inflation, which stood at 9.1 per cent in September.

Bangladesh’s inflation rate reached 9.5 per cent in August, the highest in eleven years, as per the Bangladesh Bureau of Statistics (BBS) data.

The decision to lift the interest rate cap is likely to be announced in the upcoming bankers’ meeting that will be held once the central bank governor comes back from the US.

A delegation led by Governor of the Bangladesh Bank Abdur Rouf Talukder went to the US to attend the annual meetings of the World Bank and the International Monetary Fund (IMF). Rouf will come back to Dhaka on October 20 and resume office duties at the central bank headquarters on October 23.

People usually take out consumer loans to meet living costs and buy luxury as well as other household products, such as television, refrigerator, air-conditioner, computer, and furniture.

Officials at the Bangladesh Bank said they want to discourage customers from taking out consumer loans amid the ongoing difficult situation of the economy.

They also said the central bank would not decide to withdraw the interest rate limit on SME loans because it is a very productive sector and the lifeline of the economy as well.

Consumer loans increased last year due to the interest rate cap. At the end of December 2021, consumer loans in the banking sector stood at Tk 95,419 crore, up from Tk 81,988 crore a year ago, as per the central bank data.

The consumer loan growth was 16 per cent last year.

Banks in tight spot

Banks are in a very difficult situation now due to high inflation and the forex crisis.

Most of them are facing fund shortages because they are not raising deposit interest rates due to the single-digit lending rate.

Deposit growth in banks slowed to 9.35 per cent in FY22, a significant drop from 13.8 per cent in FY21, the central bank data shows. Deposit growth was 10.5 per cent in FY20.

The Bangladesh Bank in August last year asked banks to fix term deposit interest rates at the average inflation rate of the previous three months.

Dhaka Bank Managing Director Emranul Huq said small depositors are now withdrawing money to meet living expenses, which are spinning out of control due to the hike in essential commodity prices. Mutual Trust Bank Managing Director Syed Mahbubur Rahman told The Business Post they are not getting deposits even after offering a 6 per cent interest rate.

He said the private sector credit’s increasing trend and the sharp rise in import payments are pushing up banks’ demand for funds. A senior official at a reputed private commercial bank said, “We have to maintain a spread between the deposit and lending rates.”

“Banks’ maximum lending rate has been set at 9 per cent. How can we boost deposit rates under such conditions?”

Implementing the 9 per cent lending rate was a big initiative by the government to boost industrial production and job creation.

However, local economists and the IMF have always criticised such interventions in open market economies.

Till last month, the government and the central bank governor were firm in their decision to keep the single-digit interest rate on lending unchanged.