Cenbank declares 7.13% reference rate to fix lending rate

The Bangladesh Bank has declared a reference lending rate of 7.13% for July, projecting an increase in interest rates for all types of bank loans.

Based on the reference rate, the lending rate for banks will rise to 10.13% with the addition of a 1% supervision fee, meaning the rate will be 11.13% for personal and car loans, both of which fall under CMSME (Credit to Micro, Small, and Medium Enterprises) and consumer loans.

Reference interest rates, sometimes called benchmark interest rates, are interest rates that are used as the basis for financial contracts,

The reference lending rate, known as "SMART" (six-month moving average rate of Treasury bills), applies a margin for both banks and non-bank financial institutions (NBFIs). 

Banks can apply a margin of up to 3%, while NBFIs can apply a margin of up to 5% over the SMART rate.

The central bank determined the reference rate by calculating the average of treasury bills from December 2022 to May 2023.
Furthermore, the lending rate for agricultural and rural loans will increase to 9.13%, up from the existing 8% for farm loans and 9% for other types of rural loans.

However, the lending rate of 20% for credit cards will remain unchanged.

According to a Bangladesh Bank gazette, the interest rate cannot be changed within six months of its imposition. 

This means that even if the interest rate increases, the bank cannot raise it for existing customers. 

Similarly, if the interest rate decreases, the customer's rate will not decrease.

In the case of early loan repayment, personal loans, car purchase loans under CMSME, and consumer loans will be subject to a proportionate supervision fee of 1%. 

Therefore, if a borrower wants to repay the loan before its maturity, the bank can charge a supervision fee of 0.50% on their loan.

The islamic banks have also been instructed by the Bangladesh Bank to calculate profits according to the same rules.
Bank officials state that the central bank has moved away from fixing an interest rate cap and has slightly increased the interest rate. 

However, it still remains within a regulated system and is not fully market-oriented.

Zahid Hussain, former lead economist at the World Bank's Dhaka office, commented that although the Bangladesh Bank has removed the interest rate cap to combat inflation, the move is still not market-driven as the rate's formula remains under the central bank's control.

In April 2020, an initiative was taken by bank entrepreneurs and businessmen to set the interest rate at 9%. Following that, the Bangladesh Bank issued a notification fixing the interest rate at 9%.
During the monetary policy announcement ceremony on Sunday, Bangladesh Bank Governor Abdur Rauf Talukder stated, "When the interest rate was at 16% to 17%, the rate was fixed at 9% based on a political decision to reduce the cost of doing business. At that time, foreign loans were available at 2% interest. Now, considering the current situation, the interest rate needs to be increased. We have convinced the government, and therefore, the maximum interest rate ceiling is being lifted again based on a political decision."