Bangladesh Bank has recently decided to fix the interest rate at 9 per cent for the manufacturing sector
The cost of borrowing and the cost of fund of the banks are higher than 9 percent and the fixed deposit rate is also high. Sometimes the rate reaches at 11.5 percent depending on the bank and time period. Before implementing 9 percent interest for the manufacturing sector, the central bank should take these things into consideration as well. The banks will not want to provide a lower interest rate as the borrowing rate is already higher for them.
Bangladesh Bank has directed to provide a single-digit interest rate only to the manufacturing sector. But as the sector has not been defined properly, the bankers will choose to define this in different ways and will sanction the loans to those who in return will provide more money. In a market economy, fixing a directed loan rate for a single sector does not work at all.
Another matter of concern is that there is a chance of the employees of the government-owned banks falling further into corruption. The bankers might provide loans to the non-manufacturing sector and claim that they have provided the loans to the manufacturing sector, ultimately pilfering the rest of the money that would come from the interest rate.
Share market is of utmost importance for a country and in most of the countries of the world, term loans are provided from the share market through bonds. But in Bangladesh, the context is totally the opposite. Banks are open for term loans and as a result, the corporate houses do not issue any bonds rather borrows money from the banks. Though the default loan has reached the amount of Tk1,01,16,000 crores, the banks are still thinking that it is a business for them.
What we need to do is to convince the banks that they should stick to providing short term loans and commercial loans only. Providing term loans for 10 or 15 years from the banks has already proved to be a bad idea. Keeping it up will only create problems in the future as loan defaulters do not show any interest repaying the money back to the banks.
A section of people argue that a single interest rate is not implementable for the inflation that currently exists in Bangladesh. But I am on the opposite side of this argument. Though inflation does not depend solely on the interest rate, yet if loans are provided in a lower interest rate, the cost of production will be lower. This will result in dropping the price of the product. Which means we will get the same product at a lower price than we get now and thus there is a possibility that the inflation will lower down.
If the new rule is implemented in the banking sector, there will be an increase in cash flow in the private sector, lowering down the cost of production. And it will be also helpful for the share market as well. But I highly doubt that the banks will allow this to happen, as it will bring loss for them.
I am not against curbing the loan rates but I want loan rates to be curbed in all sectors instead of giving special privilege to a single sector. Our interest rate is higher than most of the world and if the overall rate can be reduced, it will boost economic growth even at a faster rate.
Abu Ahmed is an economist and honorary professor of economics at the University of Dhaka.