Several banks have started increasing interest rates on loans, with the annual interest rate reaching 2.13 per cent, depending on the clients. Some banks have already begun on additional installments, imposing the new interest rates, without notifying the customers in advance.
Monthly loan installments now require an extra amount to be paid alongside the current month's installment. Some banks are still waiting to see how the situation emerges. However, the banks have not raised interest on deposits in the same fashion as on loans. Several banks are contemplating on raising deposit interest rates in the future, taking into account the liquidity situation.
Bangladesh Bank has introduced a new interest ceiling with the title Six Months Moving Average Rate of Treasury (SMART) bill. Bangladesh Bank will announce the interest rate every month. SMART stood at 7.13 per cent in May while it came down to 7.1 per cent in June.
Some banks are applying the new rate from July, taking into consideration the rates of May and June. Most of the banks have picked the maximum ceiling while determining the interest rate. The Asset-Liability Committee (ALCO) determines the deposit and loan interest rates after reviewing the liquidity situation of the banks.
Anis A Khan, former chairman of Association of Bankers, Bangladesh (ABB), speaking to Prothom Alo, said that the increase in interest rates will reduce the demand for loans, which will help reduce inflation. This will put pressure on the individual borrowers, but there is no other choice. However, banks could gradually increase the interest rate without setting the maximum ceiling at once so that it remains bearable.
If the installment amount soars suddenly, it could potentially lead to a significant number of individuals defaulting on their payments. Interest rates on deposits should be increased along with the increase in interest on loans or depositors will lose their principal too.
Maximum interest on various loans
Bangladesh broke away from the 9 per cent interest rate ceiling introduced in the face of the demands of businessmen and bank owners this July. Following the rule, the interest rate of all types of bank loans is increasing. Under the new rule the interest rate will be fixed based on the average interest rate under 182-day Treasury Bills, which is being called SMART.
According to the central bank's instructions, the interest rate on loans can be determined by adding a margin of 3 per cent to the average interest rate on 182-day Treasury Bills. An additional 1 per cent supervision fee will be added on personal loans and car loans under the Cottage, Micro, Small and Medium Enterprise (CMSME) and consumer credit. The interest rate on agricultural and rural credit can be fixed by adding a margin of 2 per cent with SMART. SMART in these sectors was 7.10 per cent in June.
Following that, the interest rate of bank loans reached up to 10.10 per cent currently. And the personal loan and car purchase loan under CMSME and consumer loans will have an interest rate of 11.10 per cent with an additional 1 per cent supervision fee. The interest rate on agricultural and rural loans will be 9.10 per cent. Earlier, the interest rate on agricultural loans was 8 per cent while the interest rate on all other loans was 9 per cent. The interest on credit card remains the same as before at a maximum of 20 per cent.
Interest in Shariah banks
Islami Bank holds the largest amount of loans among the banks in the country. As of last March, the bank's outstanding loan balance was approximately Tk 1.5 trillion. While the bank has not made any modifications to the deposit interest rates, there have been changes in the loan interest rates since July.
In the letter sent from the Islami Bank head office to all branches, it is said that the interest rate for personal and car purchase loans will be 10.13 per cent. Additional 1 per cent supervision fee will be added to this. Interest on CMSME loans will be 11 to 11.13 per cent.
Interest on export financing for CMSME sector will be 9 per cent. Agricultural loan interest rate will be 9.13 per cent. Apart from this, interest on current capital loans of corporates will be 10 per cent, 8 per cent on exports, 10.13 per cent on car purchase and 10.13 per cent on all other loans.
Islami Bank Managing Director Mohammed Monirul Maula told Prothom Alo, "We have increased the profit on investment following the instructions of Bangladesh Bank, which has already been implemented."
First Security, Union, Global Islami and Social Islami Bank have also started setting similar interest rates. Chattogram-based S Alam Group is the owner of these banks.
Social Islami Bank managing director Zafar Alam told Prothom Alo, "We have also increased the rate of profit on investment from July."
Apart from this, the loan interest in agriculture sector was 4-8 per cent in Al-Arafah Islami Bank earlier which has been increased to 9.10 per cent. The interest rate for loans in the large corporate, CMSME (Cottage, Micro, Small, and Medium Enterprises), and trade sectors has been raised from 9 per cent to 10.10 per cent.
Additionally, the interest rate for export financing has been elevated from 7 per cent to 10.10 per cent. Exim Bank has fixed the same interest rate. The bank's MD Feroze Hossain told Prothom Alo, "We have set the ceiling as per the Bangladesh Bank."
Conventional banks
United Commercial Bank has set a new interest rate of 9.10 per cent for agricultural loans and 10.10 per cent for export financing. Besides, the interest rate of all small, medium and large loans has been set at 10.10 per cent. Earlier, the interest rate on agricultural loans was 8 per cent, on other loans 9 per cent. Mutual Trust Bank has fixed the interest rate of 10.10 per cent excluding charges for large, small and medium.
Syed Mahbubur Rahman, the managing director of Mutual Trust Bank, informed Prothom Alo that the revised interest rate has been in effect from July onwards. The bank has been facing mounting pressure to raise the interest rate on deposits. Many banks currently provide an 8 per cent interest rate on deposits, leading to problems with deposits. The bank's liquidity management will continue to be strained for several more months. Presently, there is minimal demand for new loans.
BRAC Bank has implemented interest rates of 8.10 to 10.10 per cent for small, medium and large term and current capital loans. The same interest rate will apply to trade finance, consumer loans and lending to financial institutions. Housing loan interest will be 7.50 to 9.10 per cent, agriculture sector 8.10 to 9.10 per cent. Credit card interest rate is increased from17 to 20 per cent while 7.10 to 10.10 per cent for other loans.
Prime Bank and Mercantile Bank have similarly hiked interest rates.
Banks deducting without customer notification
Despite the clear directive from Bangladesh Bank, many banks are disregarding the requirement to inform customers before applying the new interest rate. These banks are deducting additional money from customer accounts without providing any prior notification.
Faizullah Jisan, a private sector employee, wrote on Facebook yesterday that Islami Bank used to debit Tk 25,000 on home loan installments every month, it debited Tk 29,000 this month stating inflation and increased interest rate.
According to Mohammad Monirul Maula, the Managing Director of Islami Bank, it is mandatory to inform customers before deducting additional amount from their accounts. If a customer is not properly notified, it is considered an error, and the issue will be resolved at the branch level.
*The report, originally published in Prothom Alo print edition in Bangla, has been rewritten in English by Farjana Liakat