STAR BUSINESS REPORT

The lending rate of bank loans has gone past 12 percent on the back of the rising benchmark interest rate, sending the cost of funds for borrowers higher, as the central bank’s contractionary monetary policy appears to have taken hold.

The Six-month Moving Average Rate of Treasury bills (SMART), which is used to price the interest rate of loan products, stood at 8.68 percent in January and it would be applied to fix the lending rates throughout February.

As a result, customers may see an interest rate of as high as 12.43 percent since banks are allowed to add 3.75 percentage points to the reference rate while disbursing loans.

This is the highest lending rate since the Bangladesh Bank introduced SMART in June. The maximum interest rate was 11.89 percent in January.

The SMART was launched by removing the interest rate cap in order to gradually allow market forces to determine the cost of funds and bring down demand-induced inflation. Since then, the benchmark interest rate has kept rising.

The lending rate is going up as the interest rates of government treasury bills are on the rise: the yield of treasury bills stands at a decade-high of more than 11 percent, which was 7 percent to 8 percent a few months ago, BB data showed.

The treasury bills rate has climbed since the government increased its borrowing from commercial banks after the BB suspended printing fresh money to avoid fanning inflation.

The tight monetary policy of the central bank has pushed up the borrowing cost, industry insiders say.

In its new monetary policy unveiled last month, the BB increased the policy rate, or repo rate, by 25 basis points to 8 percent, its eighth straight increase since the tightening cycle began in May 2022. The move is expected to increase the cost of funds.

Emranul Huq, managing director of Dhaka Bank, recently said the interest rate on loans is on an upward trend.

“The lending rate will rise further once credit demand picks up.”

At a meeting with the chief executives of banks on Wednesday, Governor Abdur Rouf Talukder said the banking regulator will continue to tighten