Confusion over interest cap withdrawal issue

There is confusion in the country’s banking sector on the issue of interest rate cap withdrawal, because the Bangladesh Bank has verbally instructed some, but not all banks to raise the lending rate for personal and car loans from 9 per cent to 12 per cent.

The verbal instruction came at a meeting between the regulator and Association of Bankers Bangladesh (ABB) last Monday, a senior official of the central bank told The Business Post, adding that the decision was made to rein in skyrocketing inflation.

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

The central bank official said the initiative will discourage customers from taking out consumer loans amid the ongoing economic hardships. The Bangladesh Bank will not issue any circular in this regard at this time, he added.

Bangladesh’s inflation rate had reached 9.10 per cent in September, as per the Bangladesh Bureau of Statistics (BBS) data. The inflation rate later dropped to 8.99 per cent in October.

Pubali Bank Managing Director and CEO (current charge) Mohammad Ali said, “During Monday’s meeting, ABB leaders had requested the central bank to raise interest rate up to 12 per cent on personal and car loans.

“In response, the central bank assured ABB that it will not interfere if banks raise the rate up to 12 per cent. A number of banks are going to implement the new rates.”

Seeking anonymity, a senior official of Southeast bank said, “The regulator has verbally instructed our bank to raise the interest rate on personal and car loans, and we will implement the rate hike soon.”

But not all banks received such an instruction from the regulator. NRB Bank Managing Director and CEO Mamoon Mahmood Shah said, “We did not get any such instruction from the central bank.”

One Bank managing director Md Monzur Mofiz echoed the same.

The Business Post tried to reach out to Bangladesh Bank Executive Director and spokesperson Abul Kalam Azad on phone for his comments on the matter, but he could not be reached till the filing of this report.

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.

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. The government and the central bank governor remained firm in their decision to keep the single-digit interest rate on lending unchanged until the last month.