Photo : Messenger
Bank loan interest rates in Bangladesh have continued to increase since the introduction of the 'SMART' system. Analysts attribute this situation to the increased pressure of borrowing money from banks to meet the government’s expenses.
According to the new rate, if someone takes a loan from a bank, they will have to pay up to 13.5 percent interest. Last September, this rate was around 10 percent, and before July, the highest rate imposed by Bangladesh Bank was 9 percent. As a result, entrepreneurs are worried because their cost to expand business or make new investments by taking loans from banks is increasing more than before. Additionally, there is additional pressure for those who have taken loans for personal needs.
In this situation, economists advise the government to reduce the budget. Economists believe that the government’s inability to raise the revenue needed to meet its expenditure is impacting bank interest rates. However, even though there is an expectation that inflation will decrease if the interest rate increases, its reflection is not seen in reality.
Bangladesh Bank implemented the 'nine-six' interest rate policy in April 2020 to bring down bank loan interest rates to single digits. According to this rule, banks were obliged to disburse loans at six percent to deposits and charge nine percent interest for loans. However, many economists opposed this system. In particular, after inflation exceeded nine percent last year, interest rates on loans became zero or negative in real terms, creating an opportunity to buy luxury goods with a bank loan.
As a result, businessmen and entrepreneurs were encouraged to borrow heavily, increasing the flow of money in the market. On the other hand, depositors were discouraged from keeping money in banks due to lower interest rates than inflation. Consequently, in 2022, loan disbursements increased by more than 13 percent, but deposits increased by almost nine percent.
In such a situation, in July last year, the central bank launched a new method to determine interest rates, called 'SMART.' This rate is determined by taking the Six Months Moving Average Rate of Treasury Bills or the average of the interest rates on Treasury Bills for the previous six months. Along with this, Bangladesh Bank fixed the maximum interest rate of banks by another margin, which is fixed at 13.55 percent for April.
SMART rates have been steadily increasing since last July. In this situation, the margin was estimated from 3.5 percent to 3.75 percent in the previous months, but this time, the central bank reduced it to 3 percent.
Ahsan H Mansur, executive director of the Policy Research Institute (PRI), thinks that the 'SMART' interest policy is not really smart at all. “This is the average of the last six months of interest, which is backward-looking,” he said. According to him, the government borrows more in these three months of April, May, and June. Sixty percent of the government’s budget expenditure will be in the next two-three months, most of which will be borrowed from banks. This may further increase the interest rate.
Meanwhile, the government's budget deficit in the current financial year has been estimated at Tk 2,61,785 crore. Of this, Tk 1,32,395 crore or half is targeted to be sourced from the country’s banking sector, which is about Tk 17,000 crore more than the previously revised budget.
In the last financial year, the government borrowed Tk 1,15,000 crore from the banking sector, with a major portion provided by printing money from the central bank. However, due to the increase in inflation, the government has moved away from that trend. Additionally, the sale of savings bonds, another source of revenue, has decreased due to various conditions. Consequently, the government is now relying on treasury bills and bonds as an alternative.
Special bond initiatives have been introduced to collect subsidy funds for various sectors, with banks providing money to the government by purchasing these bills and bonds. Meanwhile, commercial banks are already struggling with a liquidity crisis due to various factors, including a dollar crisis and defaulted loans. Consequently, the interest rate is increasing as the money supply is less than the demand, leading to the government borrowing money from banks at high interest rates. The six-month average interest rate on Treasury bills rose from 7.1 percent in July to over 10 percent in March.
Ahsan H Mansur told The Daily Messenger, “The growth of deposits in the banking sector is less than 10 percent, which amounts to about Tk 1,50,000 crore. If the government taps into that money, then the situation in the market is as expected.”
Dr Salehuddin Ahmed, former governor of Bangladesh Bank, told The Daily Messenger, “In this case, there is no other option for the government. The government has to borrow from the bank because its resources are limited. This is increasing the interest cost. There is no alternative if revenue does not increase and the scope of income tax does not expand.”
According to data from the National Board of Revenue (NBR), revenue collection in the first eight months of the fiscal year until February stood at Tk 2,26,586 crore, which is 55 percent of the target for the entire fiscal year.
Fahmida Khatun, executive director of the private research organization Center for Policy Dialogue (CPD), told The Daily Messenger, “With a tax-GDP ratio of around eight percent, it is not feasible to manage the government’s operational and development expenses with such limited funds. If the government had not increased its debt so significantly, there would have been more loans available for the private sector, and banks would not have charged such high interest rates.”
Messenger/Fameema
