Dhaka, Bangladesh (BBN)- Bangladesh Bank (BB) expects that the interest rates on lending will fall further in the coming days as the central bank is working closely in this regard to ensure an investment friendly economic environment.
At present, the banks have sufficient liquidity to expand loans to the potential borrowers, the central bank of Bangladesh said in a clarification on Tuesday.
“The BB has therefore been promoting credit flows to the productive sectors at lower rates of interest through various financial inclusion activities which are contributing towards the socio-economic development along with ensuring financial and macro stability,” the central bank explained.
The central bank also said interest rate depends mainly on banks’ costs of fund, administrative costs, provision expresses, profit margins, and so on.
The overall cost of fund for banks is decreasing due to rationalization of various service charges, fees, commission charges etc, avoiding high expenditure to establish bank branches, and adoption of policies towards limiting expenditure for the purchase of transport vehicles, according to the clarification.
In recent months, lending rate has not declined at the same pace as the deposit rate; however, with intensive monitoring and moral suasion from the BB, both the lending rate and the interest rate spread have decreased to 11.93 per cent and 4.87 per cent respectively.
The overall interest-rate spread in the country's banking sector came down to 4.87 per cent in March 2015 from 5.04 per cent in the previous month, the BB data showed.
The overall interest rate spread in the country’s banking sector fell below 5.0 per cent further in March 2015 after more than one year due to strict monitoring and supervision of the central bank.
The weighted average spread between lending and deposit rates offered by the commercial banks came down to 4.87 per cent in March, 2015 from 5.04 per cent in the previous month. The spread was 4.99 per cent in January, 2014.
On the other hand, the weighted average rates on deposits came down to 7.06 per cent in the same month from 7.19 per cent in the previous month while interest rates on lending dropped to 11.93 per cent from 12.23 per cent.
At the same time, the rate of inflation has been falling steadily with prudential monetary management from the BB. At the end of April 2015, the average annual rate of inflation came down to 6.57 per cent from 6.66 per cent
On the other hand, the government has announced reduction of the interest rate on all types of National Savings Certificates by around 2.0 per cent.
“As a result, the weighted average lending rate is expected to fall further in the coming days,” the central bank.
Currently, the banks are free to fix the level and structure of interest rates under the market based interest rate policy. The board of directors of commercial banks determines interest rates on their own considerations of profitability.
Though the interest rate policy is market based, the BB often sets the maximum cap for loans in different priority sectors considering national interests and the overall macroeconomic situation.
BB governor says bank interest rates to fall further
Earlier on Friday, BB Governor Dr. Atiur Rahman assured business leaders at a meeting with Sylhet Chamber of Commerce and Industry (SCCI) that the bank interest rates are already on the downturn and will fall further gradually.
The current ceiling on interest rates for pre-shipment export loans is 7.0 per cent and for agricultural loan is 11 per cent. The effective rate of interest for the Export Development Fund (EDF) is less than 3.0 per cent.
As of today, BDT 235 billion has been financed with the EDF to the export-oriented enterprises.
Around BDT 260 billion has been disbursed to the buyers’ credit sector at 6.0 per cent interest rate. The agricultural credit disbursement target for FY 2014-15 is BDT 160 billion, of which 72 per cent has been disbursed during the first nine months of current fiscal.
No more than 10 per cent (9.0 per cent in most cases) interest rate can be charged under the BB refinance scheme for SMEs and women entrepreneurs; 4.0 per cent rebate rate is applicable for the agriculture sector for cultivation of pulses, oilseeds, and spices.
The central bank of Bangladesh has also submitted a proposal to the Ministry of Finance for providing SME loans to the dairy farms at the similar rebate rate.
BDT 57 billion has been refinanced against loans to the SME sector till date.
Businessmen now can avail loan facilities from foreign sources at lower rate (London Interbank Offer Rate or LIBOR plus 3.0 to 4.0 per cent, which is less than 5.0 per cent).
Over the last five years, the BB has approved around BDT 500 billion of loans from foreign sources.
“These low cost EDF, buyers’ credit, agricultural credit, SME refinance, and foreign loans are significantly contributing towards reducing interest rates in the domestic financial market,” the BB observed.