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Single-digit interest for industrial loans

Star Business Report
The central bank yesterday decided to cap the interest rate on industrial loans in a move that would be a boon for manufacturers as their cost of funds would go down to single digit at the expense of banks' profitability.
The decision, which aims at making businesses vibrant, came at a board meeting of the central bank at the Bangladesh Bank headquarters in Dhaka.
Businesspeople welcomed the central bank's initiative, saying the measure will give a shot in the arm of the industrial sector, giving them respite from the burden of higher interest rates.
But bankers and experts expressed their concern and said it would have a negative impact on the banking sector as lenders will shy away from disbursing loans to the industrial sector due to the lower interest rate.
Banks now charge interest rates between 12 percent and 14 percent for industrial loans, creating a difficult situation for the manufacturers, according to an entrepreneur.
But they will have to give out loans to the
manufacturing sector at single digit interest rate from January 1, said Md Serajul Islam, spokesperson and an executive director of the central bank.
The banking regulator will issue a notice within a day or two to make the decision effective, he said.
A board member of the banking watchdog, on condition of anonymity, said banks would be given some financial supports to implement the initiative.
For instance, the government will park its project funds in the current account with lenders so that they do not need to give any interest to state-run agencies, he said.
"The decision to bring down the lending rate would help export-oriented industries to mitigate existing crisis," said Rubana Huq, president of the Bangladesh Garment Manufacturers and Exporters Association.
"The production cost in the readymade garments sector increased by 30 percent in the last four years. Similarly, the export earnings have continued a downward trend in recent period," she said.
The move will help manufacturers set up new industrial units and expand the existing ones, said Rubana, also the managing director of Mohammadi Group.
Asif Ibrahim, vice chairman of Newage Group of Industries, echoed Rubana.
"The measure will bring a huge positive impact for the industrial sector given the existing slowdown in the economy. New industries will benefit from the initiative as well," he said.
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But banks are in a panic because of the single-digit interest rate, as it will hit their profit.
"Every bank will see a profit decline ranging from Tk 150 crore to Tk 200 crore per year because of the implementation of the lower rate," said Syed Mahbubur Rahman, chairman of the Association of Bankers, Bangladesh, a forum of managing directors of private banks.
"The economy will get a boost but banks will fall into a crisis," said Rahman, also the managing director of Mutual Trust Bank.
Faruq Mainuddin Ahmed, managing director of Trust Bank, said banks would feel discouraged to disburse loans to the industrial sector
because of the lower interest rate.
"As a result, industrial loans will grind to a halt, which will impede the growth of the industrial sector," he said.
Khondkar Ibrahim Khaled, a former deputy governor of the central bank, said the interest rate cap contradicts the stance of the BB.
The central bank had earlier announced that banks would fix the interest rate, while the BB would monitor it, he said.
He said the lending rate had decreased significantly three to four years ago, but it has surged in recent times due to a large volume of defaulted loans.
"The interest rate will go down automatically if default loans can be
checked."
A meeting was also held at the finance ministry yesterday to implement the single digit interest rate. Md Ashadul Islam, senior secretary of the banking division, presided over the meeting where senior officials of the ministry and the central bank were present.
Earlier this month, the central bank formed a seven-member committee headed by Deputy Governor SM Moniruzzaman, asking it to recommend ways to bring down the interest rate to single digit as per an instruction of the finance ministry.
The committee has submitted a report to the finance ministry and the BB board.