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No ceiling on interest rates

Farm loan, pre-shipment exports exempted

Rejaul Karim Byron and Md Fazlur Rahman
The central bank yesterday withdrew the interest rate limit on bank loans, in a move that economists say will increase the cost of borrowing and make imported goods costlier.
In a statement, Bangladesh Bank (BB) said it has withdrawn the ceiling on the interest rate on all types of bank loans, except for pre-shipment exports and farm loans as they tire thrust sectors.
Since 2004, exporters have been receiving credit at a maximum interest rate of 7 percent, while the rate on farm loans was set at 13 percent in the last couple ofyears, a BB official said.
The decision will come into effect immediately. The central bank withdrew the 12 percent interest rate on import finance for rice, lentil, edible oil, gram, onion, date and sugar.
The official also said they lifted the interest rate limit on term loans as the banks were discouraged from lending to industrial units at fixed rates, as the cost of funds was higher due to higher deposit rates that existed for long. As a result, the banks were eager to lend to other areas.
Now banks will be able to negotiate the interest rate with loan-seekers from the industrial sector and traders of essential commodities, he said.
Jahangir Alam, a spokesman for the central bank, said in a free market economy, the interest rate on deposits and credit is based on demand and supply, and there should not be any cap on it.
"Due to the caps, banks were not encouraged to lend in the sectors, such as industrial term-loans and import financing for essential commodities. A lot of funds will be available for these sectors," he toldThe Daily Star.
Alam, also an executive director, said the central bank would however monitor the
rate to stop it from rising abnormally.
Under the financial sector reform programme, the central bank introduced flexible interest rate policy in 1989, allowing banks to determine the rate of interest. The central bank set the upper limits on loans in certain sectors in the face of the global economic crisis.
Officials also said the central bank withdrew the interest rate cap as part of its plan to lower soaring inflation and tighten private sector credit growth.
The central bank plans to bring down private sector credit growth to 16 percent by June in a bid to reduce pressures on the exchange rate and to contain inflation.
The lending cap withdrawal also aims to arrest the devaluation of the taka, which traded against the dollar at 82.0327 on Tuesday against 70.95 a year ago, according to BB.
But economists say the decision would lead to an increase in the lending rate.
"In the process, borrowing by the private sector will become costlier, which will rein in monetary expansion," said Dr Debapriya Bhattacharya, distinguished fellow of the Centre for Policy Dialogue (CPD), a think-tank.
“It is anticipated that it will have a sovereign impact on consumer price rise. We need
to be mindful that, given the structural nature of inflation, monetary contraction may not lead to the anticipated inflation control,” he said.
The noted economist said loans to the private sector becoming costlier may also affect real private investment, employment creation and income growth.
"At the same time, with the rise of the cost of trade finance, imported goods may also at the margin become costlier."
"In sum, even if the decaping of the interest rate may stabilise the price situation, it may also simultaneously affect investment and economic growth. So, the challenge is to ensure production loan off-take for the private sector in the face of higher interest rates," Bhattacharya said.
A government official, on condition of anonymity, said the government took the decision apparently under pressure from the International Monetary Fund (IMF).
In 2010, the IMF tagged 10 conditions to its $1 billion credit that includes withdrawal of the lending cap by March last year. The lender said the conditions were aimed at strengthening the monetary transmission mechanism and improving financial sectorperformance.