Economists think banks should reduce lending rate to single digit

DHAKA, April 8, 2018 (BSS)- Economists said interest rate should come down to single digit soon as the recent downward adjustment of cash reserve requirement (CRR) and decision to keep 50 percent of the funds of state agencies in private banks will meet liquidity crisis in the banking sector.

Talking to BSS, they suggested Bangladesh Bank (BB) to take pragmatic measures including strengthening its monitoring activities and maintaining transparency in the banking sector for the sake of the economy.

“There is the scope for banks to cut lending rate as the government has already reduced CRR rate, which will help meet the liquidity crisis in banking sector,” said former finance adviser to the caretaker government Dr Mirza Azizul Islam.

He said there is liquidity crisis in the banking sector because the growth of deposit has dropped recently. So, banks need more deposits to meet their liquidity crisis, he added.

“But what is more important is that the central bank has reduced CRR rate, which will help banks meet the liquidity crisis to a large extent,” said Mirza Azizul Islam.

In a recent circular, BB has re-fixed the CRR at 5.5 percent for commercial banks on bi-weekly average basis from 6.5 percent.

The government has also taken a decision to allow state agencies to deposit 50 percent of their funds to deposit in private banks, up from the ceiling of 25 percent, to tackle the liquidity crisis in the sector.

Bankers highly appreciated decisions on CRR and deposit of the funds of state agencies to private banks but said it will take time to bring down the interest rate to single digit.

“Bangladesh Association of Banks (BAB) has given an indication to bring down the interest rate to single digit by the end of the year,” Islami Bank Bangladesh Limited Chairman Arastoo Khan told BSS.

Khan, also vice chairman of the BAB, said recently banks have faced liquidity crisis, so that they need more deposits.

“More deposits mean more interest. Moreover, the banks have expenditures. So, the interest rate has been increased,” he added.

Talking to BSS, NRB Global Bank Chairman Nizam Chowdhury said interest rate depends on demand and supply.

If the flow of money in the market increases, the interest rate will normally decrease, he added.

Mentioning the government decisions on CRR and deposit of the funds of state agencies in private banks as time befitting, he said, private banks will be able to overcome the liquidity crisis, which will also help bring down the interest rate.

Social Islami Bank Limited (SIBL) Chairman Professor M Anwarul Azim Arif said if the deposit rate decreases, the lending rate will also decline.

The interest rate depends on demand and supply of money in the market, he added.

Research Director of the Centre for Policy Dialogue (CPD) Dr Khondaker Golam Moazzem said lending rate of the banks should come down in a single digit to boost up the country’s economy as the low interest rate helps accelerate economy.

The central bank can play a vital role in reducing the interest rate through beefing up its monitoring activities and creating more transparency in the banking industry, he added.

Recently, Finance Minister AMA Muhith said interest rate in the banking sector will come down to single digit within one month.

“I am glad to know that bankers have taken a decision to bring down the interest rate to single digit within one month,” he said.