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Are the days of cheap loans over?
AKM Zamir Uddin
Up until July this year, firms had been able to borrow at unprecedented lower interest rates as the cost of funds declined amid business slowdown.
But as the economy inches towards normalcy riding on falling coronavirus infections and ongoing vaccination programme, the demand for loans has made a comeback in the last couple of months.
The recovery in credit demand is expected to bring about a credit crunch – a situation that is forcing banks to raise lending rates. This was evident from a number of indicators in the banking sector, signalling the end of cheap loans in Bangladesh.
Bankers say the lending rates are likely to increase in the next couple of months as the economy is gradually recovering from the slowdown brought on by the coronavirus pandemic.
A rising trend of import financing and demand for short-term loans are playing a major role in pushing up the credit demand.
Four top bankers say the lending rate has already started to increase in keeping up with the demand for loans.
The weighted average lending rate stood at 7.24 per cent in September, unchanged from August, according to data from the Bangladesh Bank. But, the average lending rate had faced a downward trend since at least January last year.
In addition, the yield on Treasury bills and bonds has seen an upward movement in recent months.
The interest rate on a five-year T-bond stands at 6.50 per cent this month in contrast to 5.75 per cent a month ago.
The government chiefly borrows from the banking sources by issuing T-bills and bonds, and the rate usually increases if it takes on debts on a regular basis.
The government secured a net loan of Tk 9,696 crore from the banking sector between July and October.
Banks also consider the yields on the government securities while setting the interest rate of their lending products.
The interest rate of the inter-bank call money market stood at 2.25 per cent in October, up from 1.90 per cent the month before.
The inter-bank call money market is a platform where lenders borrow and lend each other on an overnight basis. Banks commonly meet short-term funding requirements by borrowing from the market.
The credit growth in the private sector stood at 8.77 per cent in September, up from 8.42 per cent a month earlier.
“The era of cheap lending rate has ended as the demand for loans is on the rise,” said Mirza Elias Uddin Ahmed, managing director of Jamuna Bank.
“The rates are gradually increasing as the economy is getting back its momentum.”
The bank now charges interest rate between 7 per cent and 7.5 per cent on working capital, which was 3-6 per cent a couple of months ago. Working capital, with a repayment tenure of a maximum of one year, is given out to businesses to fulfil their regular expenses.
The interest rate on time loans, which carry a repayment period from three to six months, has doubled to nearly 6 per cent at Jamuna Bank, Ahmed said.
The pickup in the lending rates also came after the central bank asked banks to set an interest rate on deposits that is higher than the inflation rate. This has given a boost to the lending rate as banks are now compelled to pay more than 5 per cent to savers.
The interest rate on term loans has recently touched 8 per cent, which had declined to 6 per cent a couple of months ago.
“The surge in the import financing has also been responsible for the upward trend of lending,” Ahmed said.
Sohail RK Hussain, managing director of Meghna Bank, said that liquidity stress in the banking sector might appear in the days ahead as credit demand increased.
Meghna Bank is charging 5.5 per cent for the working capital loans, up by at least one percentage point compared to the levels seen at the height of the pandemic.
The same is also applicable to home loans as the interest rate stands at 8 per cent in contrast to 7.5 per cent three to four months ago.
Md Abdus Salam Azad, managing director of Janata Bank, said that credit demand had accelerated as the economy opened up.
“There is no scope for the lending rate to go down in the coming days.”
The state-run lender has been following 6 and 9 per cent rates for deposit and loans respectively for months, as instructed by the central bank in April last year.
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