Banks fail to bring down interest rate to single digit

Fakhrul Islam and Shanaullah Sakib | Update:

The interest rate on bank loans has not fallen to a single digit number yet although the issue has been discussed for one and half years.

Loan disbursement has fallen and the deposits are not significant.

Meanwhile, default loans have increased although the interest rates have not decreased.

The default loans have increased to Tk 220 billion in nine months and the high interest rate is being blamed for this.

Finance minister AHM Mustafa Kamal formed a fresh committee on Monday to work out means of reducing the interest rate.

Businessmen and experts said the high interest rates are not the only problem. The expenditure on bank funds has to be reduced and willful defaulters have to be brought to justice, they suggested, adding good governance has to be established in the banking sector.

During a meeting with public and private bank chairmen and managing directors on Sunday, the finance minister said the high interest rate causes to default loan. The interest rate has to be reduced to one digit and it would be effective from January next, he added.

Speaking to Prothom Alo on Monday, Federation of Bangladesh Chambers of Commerce & Industries Sheikh Fazle Fahim said, “We have been hearing about the one digit interest rate for one and half years, but we don’t see any progress.”

He said the businessmen were exhausted by paying value added tax (VAT) and high bank interest rates.

In the meantime, bank owners have taken various facilities in one and half years, saying that the interest rate will be reduced to one digit.

The facilities include 50 per cent of government deposit to be kept in private banks, reduction of cash reserve ratio (CRR) by one per cent, reduction of interest rate on repo and corporate tax.

Besides, through the amendment of the Bank Company Act, four members of a family are allowed to become bank directors instead of two and a director can stay on the board of private banks for nine years instead of three.

When asked about the non-reduction of interest rate, Bangladesh Association of Bankers (BAB) president Nazrul Islam said, “The deposit is not available against the demand of loan. Although the government promised to give 50 per cent deposit, that is not available. There is a pressure of adjustment of loan-deposit ratio. For these reasons the banks are unable to reduce interest rate despite willingness.”

On the debate that the interest rate is higher for default loan or the default loan is higher for the higher interest rate, Bangladesh Knitwear Manufacturer and Exporters’ Association (BKMEA) former president Fazlul Hoque quoted an extract of writer Syed Mujtaba Ali saying ‘people don’t buy books because they are costly, and books are costly because people don’t buy books.”

However, some industrialists and businessmen think the higher interest rate is liable for the default loan. But many do not want to blame the interest rate alone.

They think the willful defaulters are also behind this and the tendency of bank owners to make higher profit is no less responsible for this. There are also weaknesses in the bank management, they added.

Citing an example, Sheikh Fazle Fahim said, “A total of Tk 50 million has been given for a project. More Tk 20 million is needed to implement the project, but Tk 5 million is given. The project ultimately fails.”

Speaking to some bank officials and businessmen, it is learnt that banks often do not verify to disburse loan. In many cases bank officials teach how to apply to get bigger loan.

With full knowledge banks disburse loan to bad clients. Whenever the banks cannot recover the loan, the problems arise.

Abdul Monem Limited deputy managing director Mahiuddin Monem said without verification Tk 5 billion is disbursed as loan for the implementation of a project, but only 1 billion was originally needed. As a result the money is wasted.

He said these matters have to be taken into consideration alongside reduction of interest rate.

About the overall situation Policy Research Institute (PRI) executive director Ahsan H Mansur there is a liquidity crisis in banks. The purchasing power of the people is low.

Such a time the interest rate is asked to be reduced and the time does not seem to be suitable.

Mansur fears the interest rate may go up instead of coming down.

*This report, originally published in Prothom Alo print edition, has been rewritten in English by Rabiul Islam.

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