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Higher lending rates put businesses in tight spot

Their production costs rise, competitiveness erodes

Sajjadur Rahman
High lending rates by banks have put businesses in a tight corner, leading to a rise in their production costs, businesspeople and bankers said.
Banks are charging as high as 18 percent interest rate on loans given to the manufacturing sector. The rates rise to more than 20 percent for small businesses.
Bankers blamed the hike in lending rates on the rise in their cost of funds. However, they also said the rates should be brought down for the sake of competitiveness of the businesses.
"Higher lending rates have pushed up our production costs. It also affected people's purchasing power,” said Iqbal Hossain, managing director of PHP Group.
After a slowdown in construction activities, the manufacturing sector is showing sluggish growth due to the exorbitant lending rates, he said.
PHP is one of the largest groups engaged in manufacturing and trading business. Although PHP is a big corporate client, banks charge as high as 16 percent interest from the Group.
In addition to the lending rates, borrowers are being charged with penal interest at 2 percent for delays in payment, said
Hossain.
Nasir Group of Industries, another leading manufacturer, said high interest rates are eating into their competitive edge over their competitors in other countries.
“Indian banks charge highest 9.5 percent interest, which is almost double compared to what we pay,” said Nasiruddin Biswas, managing director of Nasir Group.
Like PHP, Nasir Group also faces 2 percent penal charges for delays in payments for bank loans. He said the overall business is not going well in recent months and often he fails to pay loan instalments on time.
"The high borrowing cost is not feasible for us," said Biswas who took loans at an 11.5 percent rate in 2011.
The lending rates shot up in early 2012 when the central bank withdrew a cap on the rates imposed in 2008 to help businesses cope with the global recession. The Bangladesh Bank, however, kept the cap at 7 percent and 13 percent on export financing and farm loans respectively.
The BB allows 5 percent net interest margin (the spread between lending and deposit rates), which is 3 percent for banks in India.
A high interest rate has multiple impacts on the economy. It decreases capital investments, stock exchange indices and value of other assets, profitability of firms, private investment and consumptioncredit.
“Now no banks lend at less than 17 percent rates, which is more than 20 percent for small businesses,” said a branch manager of United Commercial Bank, a private bank.
Helal Ahmed Chowdhury, managing director of Pubali Bank, said lending rates should be lowered, but it cannot be done without a proportionate adjustment in deposit rates.
Banks pay 12.5 percent interest, even for onemonth deposits. Some banks offer even more for deposits. “Treasury management of some banks is weak and they have distorted the deposit market,” said Chowdhury.
The BB in its last review in 2012 increased the repo (short-term lending) rate by 50 basis points to 7.75 percent, which is 8 percent in India.
The reverse repo, at which the central bank absorbs excess liquidity through borrowings from banks, was raised to 5.75 percent, which is 7 percent in India.