Bangladesh Bank governor Abdur Rauf Talukder announces the monetary policy for the first six months of 2023-24 fiscal at a press conference in the central bank in Dhaka on 18 June 2023.
Prothom Alo

Bangladesh Bank on Sunday announced the monetary policy for the first six months of 2023-24 fiscal, lifting the interest cap on bank loans and raising the repo rate.

According to the new policy, the lending rate celling has been set at maximum 10.12 per cent for banks, 12.12 per cent for non-bank financial institutions (NBFIs).

Besides, the lending activities for CMSME (cottage, micro, small and medium enterprises) and consumer loans may be subject to an additional fee of up to 1 per cent to cover supervision costs.

Bangladesh Bank governor Abdur Rauf Talukder announced the monetary policy at a press conference on Sunday.

Central bank’s chief economist Md Habibur Rahman explained the new policy on lending rate at the event.

Habibur Rahman said banks and financial institutions can add 3 and 5 per cent of interest rates respectively on top of the average yields of 182-day treasury bills, and that will be the maximum interest rate, he added.

According to Bangladesh Bank data, the average yield of the last 182-day treasury bills was 7.12 per cent.

Replying to a query from journalists, governor Abdur Rauf Talukder said, “It was a political decision to fix lending rate ceiling at 9 per cent for banks and it is also a political decision to lift this celling. Our achievement is we have convinced the political leadership on the situation. When the lending rate ceiling was set, bank interest rates increased to 18 per cent and interest on foreign debt was 2 per cent. Interest on foreign debt is 9-10 per cent now. Besides, its spending is also increasing due to depreciation of money.”

The newly announced monetary policy has increased the policy rate or repo rate by 50 basis points to 6.5 per cent from 6 per cent to contain inflation. Besides, reverse repo rate, which will now be called the standing deposit facility (SDF), has increased by 25 basis points to 4.50 per cent from 4.25 per cent.

Calculation of new lending rate or reference rate

Bangladesh Bank would introduce a market-driven reference rate for all types of bank loans, replacing the previously imposed lending rate cap, 9 per cent.

According to the monetary policy, Bangladesh Bank relies on the yields of 182-day treasury bills (TBs) offered by participating financial institutions/individuals through primary dealers to determine the reference lending rate. The central bank carefully examines these rates to establish a benchmark for lending activities, providing transparency and stability in the financial sector.

The yields represent competitive and market-driven outcomes that carefully take into account the cost of funds. They serve as significant indicators of interest rates prevailing in the market.

The process of determining the reference lending rate involves several steps. First, the central bank calculates the weighted average yield of the 182-day TBs on a weekly basis. Next, Bangladesh Bank calculates the simple average of the four weeks’ weighted average yields of the 182-day TBS on a monthly basis. Then, the BB computes the moving average of the yields of the 182-Day TBs over the past six months. This moving average provides a more comprehensive view of interest rate movements, smoothing out short- term fluctuations and capturing longer-term trends. It helps establish a stable and reliable reference rate for lending purposes.

As per the new policy, the reference lending rate, known as the "SMART" (six months moving average rate of treasury bill), will be announced on the first working day of each month through the central bank website.

This will allow market participants, businesses, and individuals to access the up-to-date reference rate for their lending activities, the monetary policy reads.