The directive to decrease interest rates on bank loans has pitched the banking sector into a dilemma. Under pressure to keep the interest rates low the banks are now cautious in providing loans. They are hesitant to approve new loan proposals too. As a result loans in the private sector this October reached the lowest in nine years.
That is not all. With special facilities being provided to regularise certain loans, many good borrowers have now stopped paying the instalments on their loans. Private bank clients are also rushing to the state-owned banks due to the decrease in interest rates there.
Bankers have said that interest rates should be allowed to take their own course. The pressure is causing a drop in loan distribution. Economics dictates that if the banks get deposits at low interest rates.they will automatically provide loans at low interest rates. That is how interest rates in 2017 were reduced to a single digit. The banks have to devise a strategy to reduce default loans and as well as to control interest rates. The attempt to forcefully cut down interest rates had led to a fall in loans which is harming the economy.
Chairman of the Association of Bankers Bangladesh (Syed Mahbubur Rahman ) tell Prothom Alo that many banks are now extra cautious in providing loans after the announcement to reduce interest rates to a single digit. Loan growth has decreased. At the same time, deposits are insufficient. Then again many borrowers have stopped paying the instalments on their loans in order to avail certain facilities. Meanwhile though 50 per cent of government deposits are supposed to come to the private banks.they have not received even half of this. All these factors have put the banking sector under pressure.
Negative credit flow
Bangladesh Bank over the past six months issued several letters to the banks instructing them to lower interest rates on loans. But now banks are wary in giving loans. Many of the old and good borrowers are getting loans on less than 10 per cent interest.but the newer borrowers are not. This has had a negative impact on the small and medium enterprises.
The state-owned banks are providing loans with single-digit interest to large projects of Tk 4000 crore to Tk 5000 crore in the gas and power sector. The private banks have fallen back. Last October, private sector credit flow fell to 10.04 per cent, the lowest in nine years.
In the meantime regulations are being repeatedly changed to favour loan defaulters and the banks loan recovery has fallen. Default loans have increased. Default loans have now gone up to around Tk 1.163 trillion.that is almost 12 per cent of total loans.
Single-digit interest
Under pressure from bank owners the government brought about several changes in the Bank Company Act in 2018.Allowing four members of the same family to be on the board of a bank for a stretch of nine years. Then on 1 July 2018 the Bangladesh Association of Bankers announced maximum 6 per cent interest on deposits. And maximum 9 per cent interest on loans. But this remained restricted to the announcement. The bank owners over the past one and a half years have been taking all sorts of facilities in their name of bringing interest rates down to a single digit, but the rates have not lessened. Only very few private banks along with eight state-owned banks have brought this lower interest rate into effect.