The banking sector's huge liquidity crisis is owed to a high amount of default loans, rising demand of dollars to meet import payments and government's bank borrowing, according to experts.
In this situation, economists and bankers remarked bringing down lending rates to single digits is going to be more challenging.
“The banking sector faces liquidity crisis owing to various reason. High amount of non-performing loans (NPLs) in the sector is one of them. These defaulted loans cannot increase. On the other hand, the recovery of defaulted loans should increase as well,” said World Bank Dhaka office’s Lead Economist Zahid Hussain.
Banks' NPLs (none-performing loans) rose by a staggering Tk 169.62 billion from January to March this year, increasing the amount of stress loan in the banking sector to nearly Tk1.11 trillion, according to Bangladesh Bank data.
The government has increased the bank borrowing target in next 2019-2020 fiscal year, to tackle the liquidity crisis. Now most private banks are unable to lend owing to liquidity pressure, he added.
Anis A Khan, managing director of Mutual Trust Bank and former chairman of Association of Bankers, Bangladesh Limited (ABB) said they want to bring lending rates down, but owing to the current liquidity pressure, they are unable to do so.
NRB Commercial Bank Managing Director and CEO Khondoker Rashed Maqsood said interest rates depend on market forces and should not be fixed. "To collect deposits, we have to pay more interest; therefore the interest rate for lending cannot be reduced. It is possible to reduce the lending rate if we get deposits from government organizations at 6% interest rate."
“In an open economy, we cannot fix interest rates on both lending and deposit. It may hit the profits of banks,” said former Bangladesh Bank governor Salahuddin Ahmed.
He termed the decision of bringing down the lending and deposit rates a political one. “That is why it is difficult to implement," he said.
In his maiden budget on Thursday (Jun 13), Finance Minister AHM Mustafa Kamal put forth a number of reforms to bring back discipline in the ailing banking sector.
“The move to reduce lending rates to single digit has been made with a view to make industries and businesses more competitive," reads his budget speech posted on the finance ministry’s website.
In the official post-budget media briefing on Friday, Prime Minister Sheikh Hasina said "It was always our intention to bring down the lending rates to single digits, but many private banks did not comply. Strict action will be taken against those who did not comply in this regard."
Two -thirds of the commercial banks are yet to bring down the lending rate to single digit, although they had promised to ensure 9% rate from July 2018, according to Bangladesh Bank data.