Interest Rate Cap: New headache for pvt banks

Most of the private banks are in trouble due to their recent decision to cap interest rate on deposits at 6 percent as the state-run organisations and corporate groups are unwilling to keep funds with them at such a low rate.  

The Daily Star talked to a number of bankers who said state-owned enterprises and corporate groups are demanding 9 to 11 percent interest on deposits for three months.

“Depositors are not willing to keep money with private banks at 6 percent interest ... We are now facing difficulties in liquidity management,” said a top official of a private bank, seeking anonymity.

Earlier on June 21, Bangladesh Association of Banks (BAB), a platform of private banks' directors, decided to cap the interest rate on deposits at 6 percent and the lending rate at 9 percent from July 1, provided that the banks get deposits at 6 percent interest.

According to the BAB decision, the maximum interest rate on deposits for three months is 6 percent.

The BAB decision was vetted by the finance ministry and Bangladesh Bank.

The move came weeks after the government showered private banks with a raft of privileges, including one percentage point cut in cash reserve ratio (CRR) and 2.5 percentage points reduction in corporate tax, which drew criticism from different quarters.

The CRR is a specified minimum fraction of the total deposits that banks must hold as reserves either in cash or as deposits with the central bank.

The state banks also decided to bring down the lending rate to a single digit.

Bankers, however, said it will not be able possible for the banks to reduce the lending rate to a single digit if they don't get deposits at 6 percent interest.

Seeking anonymity, the managing director of a private bank told this correspondent yesterday that a state-run bank refused to keep its funds with his bank at 6 percent interest.

The state-run bank deposited Tk 137 crore in the bank three months ago at an interest rate of over 10 percent, and the fund will mature next week.

The MD said the state-run bank conveyed to them that it will withdraw the fund upon maturity if it doesn't get 9 percent interest. 

“We have already sought intervention from the central bank in this regard.” 

Bangladesh Bank on Monday asked the state-run banks to deposit funds in private banks at 6 percent interest after Standard Bank Ltd alleged that state-run Agrani Bank refused to keep funds with the private bank at this rate.

Talking to this correspondent on Thursday, an official of a private bank said a leading mobile company told the bank that it would withdraw deposits of Tk 70 crore if the bank didn't offer it 11 percent interest.

“We cannot offer them such a high interest rate,” said the official.    

M Kamal Hossain, managing director of Southeast Bank, told this newspaper that a number of individual savers applied to the bank for withdrawing funds.

“A depositor at our Basundhara branch has applied for withdrawing Tk 19 crore from the bank because of 6 percent interest rate ... This is not a good sign for the banking industry.”

The MD thinks individual savers will withdraw funds from private banks and use those to buy national savings certificates and bonds that offer return of more than 11 percent.

The government should cut the interest rate on savings instruments immediately so that it matches the deposit rate offered by banks, he said.

Syed Mahbubur Rahman, chairman of the Association of Bankers Bangladesh, a forum of managing directors of private banks, said everybody should play his due role in bringing down the lending rate.

“A number of state-owned banks and agencies are yet to respond to the central bank directive to deposit funds in private banks at 6 percent interest rate,” he said.

It will be tough to implement the initiative unless the government and non-government entities agree on the new deposit rate, said Mahbubur, also managing director of Dhaka Bank.

“It will be highly appreciated if the authorities concerned instruct all to follow the new rate,” he said.