Photo: Messenger
Due to the increase in demand for loans in both the public and private sectors, there has been a liquidity shortage in the banks. As a result, there is unhealthy competition in the banking and financial sector to collect deposits.
Some weak banks are offering interest rates up to 13-14 percent. By accepting such high-interest deposits, institutions are compelled to provide loans at interest rates of at least 16-17 percent as per existing provisions. Additionally, some weak non-bank financial institutions (NBFIs) are said to be offering interest rates as high as 17-18 percent for deposits. In such cases, loans should be given at 20-21 percent interest. This unequal competition is leading to an increase in loan interest rates, causing distress for borrowers. Concerned individuals fear there is no guarantee whether this high-interest money will be returned.
According to economists, past irregularities have resulted in deposits being attracted by attractive offers, only to see both interest and principal lost. In other words, if deposits with unusually high interest rates are taken, there is no interest and no hope of recovering the principal.
Data shows that on the first day of the new year (2024), the bank loan interest rate in the country increased to 11.89 percent. This rate was the highest at the end of 2023, at 11.47 percent. As the interest rate on government debt rises, so does the interest rate on private sector loans. Since last July, the interest rate on bank loans given to ordinary customers has been determined in relation to the interest rate of government loans.
Dr. Saleh Uddin Ahmed, the former governor of Bangladesh Bank, told The Daily Messenger, “Interest rates on deposits and loans are now increasing to reduce inflation. However, it can go up to a maximum of 12-13 percent. If you conduct business with deposits yielding 17-18 percent interest, it will not survive. And if this is applied to long-term home loans, borrowers could face dire straits.”
He also emphasised the need for depositors to be cautious. “You can’t simply accept any offer that comes your way. It's important to assess the stability of the bank or financial institution. Unchecked deposits can be risky,” he added.
Bank sector stakeholders warned that if this trend continues, it would send a significant ominous signal. High-interest deposits could be at risk of exploitation, and there is no business in the country that can sustain such high deposit rates.
Upon inquiry, it was revealed that a weak fourth-generation bank offered a 13 percent interest rate on 10-year term deposits. Additionally, a non-bank financial institution is offering one-year term deposits at 12 percent. For deposits exceeding Tk 1 crore, the interest rate will be 13 percent. As the amount and duration of deposits increase, the interest rate rises to 14-18 percent. However, these are unofficial offers made in the strictest confidence through personal communication. Sometimes, these attractive offers are communicated through text messages.
Meanwhile, the official interest rate on bank loans has surpassed 13 percent. This marks the highest interest rate on loans since the removal of the 9 percent rate last July. In February, the highest interest rate on bank loans was 12.43 percent, which increased to 13.11 percent in March.
Following the central bank’s new method of determining loan interest rates, the loan interest rate is now increasing every month. Bank borrowers, including businessmen and industrialists, are facing difficulties. When seeking new bank loans, they must calculate higher interest rates, resulting in increased business costs.
On the other hand, Bangladesh Bank has made some changes to the method of determining interest rates due to the significant increase in loan interest rates. Currently, the base rate of loan interest is determined by the 'Six Months Moving Average Rate of Treasury Bill' or SMART method, with an additional 3.75 percent interest added to it. Banks determine the final interest rate of the loan. The rise in SMART rates in March has somewhat curbed the added interest.
According to Bangladesh Bank, a 3.5 percent interest rate will be added to the SMART rate in March, whereas previously, 3.75 percent was added. Banks have a ceiling only on loans, while non-banking financial institutions also have a ceiling on the interest rate on deposits. These institutions can collect deposits by adding a maximum interest of 2.50 percent to the SMART rate.
Non-Banking Financial Institutions (NBFIs) can charge interest on loans by adding a margin or interest at a maximum rate of 5.50 percent to the ‘AMSRT’ rate. Consequently, their maximum interest rates on loans will be 15.11 percent and 12.11 percent on deposits in March, compared to 14.43 percent and 11.43 percent respectively in February.
Messenger/Disha
