BB plans to lift 9pc lending rate cap to increase bank deposits

The central bank is considering lifting the 9 percent cap on bank loan interest rates, which was imposed as a condition for a $4.7 billion IMF loan.

The cap is also being lifted due to high inflation, which has eroded people's saving tendencies. Furthermore, banks have been struggling to collect deposits due to the lending rate ceiling, leading to a liquidity crisis.

The issue was discussed at a meeting on monetary policy held on Sunday at Bangladesh Bank with Governor Abdur Rouf Talukder in the chair, the central bank sources said.

Primarily, Bangladesh Bank plans to set reference rate and corridor rate in case of bank interest rate. The reference rate will be average bond interest rate and the corridor rate will be set by the central bank. The bank interest will be aggregate of these two rates, sources added.  

Against its loan, International Monetary Fund (IMF) has set a condition to lift the interest rate cap and make it market based.

“The meeting discussed the next monetary policy that the central bank will announce in June. It also discussed the interest rate issue as there is an IMF condition to leave it on the market,” said a central bank official, who attended the meeting, requesting anonymity.

The meeting discussed on how to set a strategy to leave the interest rate on the market after lifting the existing 9 percent ceiling.

For instance, he said, Bangladesh Bank will set a rate upon an average rate of five types of bond like the aggregate interest rate calculated by adding bank fixed rate on LIBOR rate.

Bankers have been demanding for withdrawal of the ceiling with an argument that they cannot increase deposit rate to woo clients because of the 9 percent cap on loans.

In a recent study paper, the central bank also recommended for withdrawal or the ceiling or raising the loan interest rate.

Bangladesh Executive Director and spokesperson Mezbaul Haque said: “The high officials of the central bank have discussed what will be the bank interest rate in the new monetary policy.”

In this case, the central bank is thinking of banding and reference rate, which is being scrutinized now, he said, adding that all the aspects of the interest rate will be elaborately announced in next monetary policy.

According to latest Bangladesh Bank data, average interest rate of five types of bond is 8.30 percent. If the regulator fixes 5 percent rate upon this average rate, bank loan interest rate will rise to 13.30 percent.

In the recent FBCCI business summit, the BB Governor also hinted at change in bank interest rate, saying that the central bank is trying to control inflation by squeezing demand.

In April 01, 2020, Bangladesh Bank directed for cutting loan interest rate to single digit except for credit cards. However, in its January-June monetary policy for FY23, opened the deposit rate.