EARLY this week, there were news reports suggesting that a move has got underway to reduce the lending rates of the banks. Bangladesh Bank Governor Fakhrudding Ahmed while meeting the chief executives of local commercial banks called upon them to decide on their own as to how they would like to reduce the interest rates. Finance Minister M Saifur Rahman has been a known advocate for bringing down the costs of lending which are higher in Bangladesh compared to what the neighbouring countries like Pakistan and India are operating with. It's also common knowledge that the country's chambers and business bodies have consistently voiced the demand for a reduction in borrowing rates arguing that the higher rates were a disincentive for investment. This paper, too, has editorially pressed for a cut-back on lending rates whenever the opportunity presented itself to do so.

The issue is nothing new. And, there is no second opinion on the question that the interest charged on term loans which is between 13 and 16.5 per cent and that on export credits ranging between 7 and 10 per cent will have to be reduced to bolster investment. But the million dollar question is: how we do it?

Let's see what the banks say. Commercial banks, both in the public and private sectors, have often been asked by the government to lower their lending rates. The private banks' response has been that since they have to collect funds from the depositors on high interest rates, they lack maneuverability to cut back on lending rates. The nationalised commercial banks (NCBs), on the other hand, creak as they do, under the burden of bad loan portfolio, are diffident in lowering their interest rates.

In other words, the banks are looking outward for a solution in the form of an intervention from the government without accepting their part of the responsibility. Two approaches are being talked about: one, reduce the deposit rate to bring down the lending rate; and two, lower the savings instrument rate to reduce the lending rate. We know that the government had earlier reduced rates on both deposits and savings certificates. Another round of reduction in this two elements seems to be in the offing. The earlier cut-backs did not yield dividends in terms of reducing the lending rate or raising the level of investment nor are they likely to do if resorted to again.

The issue here is the margin between the average deposit rate and the average lending rate which has to be explained in terms of the efficiency or deficiency factor. In our context, the margin between deposit rate and lending rate is 7 per cent which is unusually high -to be of any good to investment. It has to be around 3 per cent. The cost of running banks and that of intermediation in particular are very high in Bangladesh. If these could be reduced with banking efficiency and managerial skill then there wouldn't have been the need for cutting back on deposit and savings instrument rates.

Private banks have cut back on their operational costs by computerisation. Their efficient management, on the whole, is yielding rich dividends. With the range of profitability they enjoy, they should be able to reduce the lending rates. And, so far as the NCBs go, the huge burden of classified loans they carry bears testimony to their trackrecord of mismanagement. Most of them face liquidity crisis from time to time. Over-staffed, their overhead costs are higher than they can afford. The government keeps borrowing money from them as do the losing state-owned enterprises (SOEs). For a change though, the government's public borrowing could be reduced this time by virtue of the real prospects for IMF and World Bank funding.

On this optimistic note, the issue of reducing interest on deposits and that on savings certificates should be addressed with due deference to the interests of the depositors and savers. The dilemma of conflict of interests between the depositors and the lenders is largely a self-created problem in our context. Why should the depositors, fixed income group savers and pensioners be punished because of the fault of others. Does it not make a strong case for banking reform?