Banks to cut lending rates in phases

Banks are sticking to their directors' decision to bring down the lending rates to 9 percent from July 1 amid growing dilemma over how to execute the plan for a large number of loan products.

Banks lend under different categories: industrial loan, manufacturing loan, working capital, SME loan, credit card, retail and wholesale loans, and many more.

Some of these loans such as SME and credit card are unsecured and the operating costs of these loans are higher than others, leading lenders to charge more for these products.

For example, banks charge 30 percent or more for credit cards and 16-18 percent for SME loans.

But the Bangladesh Association of Banks (BAB), a forum of directors of the private banks, last week issued a directive asking all of its member banks to reduce the interest rate to 9 percent from 12-15 percent now without specifying any loan product. It also asked banks to bring down the deposit rate to 6 percent.

But banks are unsure when its cost of funds will come down to 6 percent from 8 percent to 10 percent now, which, according to bankers, is a prerequisite for cutting the lending rates. 

Yet, bankers are taking preparations in line with the BAB's instruction on the lending rate.

The Association of Bankers Bangladesh (ABB), a forum of chief executives of the private banks, will discuss the issue at a meeting today.

"Initially, we will bring down the lending rates to 9 percent for industrial and manufacturing loans as well as for working capital," said a chief executive officer of a private bank.

Another CEO said his bank will cut the lending rate for large corporate borrowers as per the BAB's decision.

A third CEO said his bank will cut the interest rates in different phases.

The banking sector has been going through a difficult period for a long time because of liquidity crisis, poor governance and loan scams in recent years.

The BAB has taken advantage of the situation and successfully lobbied with the government to win some concessions, which include a one-percentage point cut in cash reserve ratio and an increase in the share of private banks in the deposits of the state-owned entities.

The central bank has made funds cheaper for all banks by reducing its repo rate by 75 basis.

In the budget for the next fiscal year, the finance minister has proposed a 2.5 percent cut in corporate tax for banks, non-bank financial institutions and insurance companies.

Syed Mahbubur Rahman, chairman of the ABB, said the interest rate cut will depend on the boards of respective banks and bankers will execute the decision only. 

"But the biggest challenge of how to reduce the deposit rates remains," Rahman told The Daily Star.