Non-bank interest cap bucks global trends
Bangladesh Bank yesterday imposed an interest rate cap on deposits and loans with non-bank financial institutions, matching the current cap on banks, although rates are rising globally to control runaway inflation.
Thus, NBFIs will have to charge a maximum of 7% on deposits and 11% on loans from July 1, according to a notice from the BB.
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The central bank’s move came two years after it capped interest on loans at 9% and deposits at 6% for banks, sparking debate over whether such intervention is the right approach as it bypasses market forces.
The interest cap comes at a time when countries are raising rates to fight inflation. For example, in March the US central bank approved its first interest rate hike in more than three years.
A number of economists and the International Monetary Fund (IMF) have already opposed such intervention.
Economists and senior NBFI executives say the interest cap would be a blow to the financial health of the majority of non-banks, which are already struggling to keep pace with banks in mobilizing deposits.
In addition, the interest rate cap on deposits will further penalize savers, who have been hit hard by the lower interest rate regime given the upward trend in inflation.
Some NBFIs have recently started offering interest rates above market rates to collect deposits, the BB said.
High interest rates have fueled the cost of funds for NBFIs. The higher interest rate on deposits quoted by NBFIs pushed up the lending rate, which negatively impacted borrowers.
As a result, borrowers’ ability to repay has eroded, sending delinquent loans to higher levels and thus causing negative effects on the whole economy.
The last limit will not apply to deposits collected before the entry into force of the BB instruction.
Mominul Islam, chairman of the Bangladesh Leasing and Finance Companies Association, a platform of chief executives of NBFIs, said most banks are now mobilizing deposits at an interest rate of 6%.
“Thus, NBFIs will face tough competition with banks to chase deposits. Many non-banks whose financial health is fragile will not be able to attract the attention of customers.”
If NBFIs can’t manage the funds, they won’t be able to lend, said Islam, also managing director of IPDC Finance.
Kanti Kumar Saha, managing director of Lankan Alliance Finance, says interest rates should not be fixed as market forces would determine it.
“Fixing interest rates cannot solve the existing problems of NBFIs.”
Mustafizur Rahman, a prominent fellow at the Center for Policy Dialogue, says imposing the interest rate would create problems for NBFIs in collecting deposits and disbursing loans.
“Bangladesh Bank should reconsider its decision on a temporary basis. Many NBFIs are now in crisis and the crisis will be prolonged if they cannot raise funds as planned.”
Monzur Hossain, research director of the Bangladesh Institute of Development Studies, says the interest rate cap distorts the entire market.
“Fixing the interest rate is not the right approach because it affects the market mechanism. The low interest rate on deposits will affect savers.”
The economist argues that the real interest rate becomes negative if inflation is taken into account.
“So people will feel discouraged from keeping deposits in banks.”
Inflation in Bangladesh jumped to 6.17% in February, its highest level in 16 months, due to soaring food prices, which further eroded consumers’ ability to buy.
If inflation is taken into account, depositors placing their funds in banks suffer losses.
“A flexible interest regime will be helpful for the market,” Hossain said.
Hossain points out that the problem in Bangladesh is that the interest rate does not go down in Bangladesh once it goes up.
“This is because the banking sector is oligopolistic in nature and the big banks dominate the market,” he said, adding that monetary instruments, used by the central bank to influence the interest rate, do not not work properly in Bangladesh.
The companies, however, welcomed the move, saying it would help them manage their funds more cheaply.
“This is a positive move. The measure will help businesses keep costs low at a time of high raw material and commodity prices globally,” said Md Jashim Uddin, Chairman of the Federation of Bangladesh Chambers of Commerce and Industry.
Capping interest rates on non-banks will also bring interest rate uniformity across the financial sector, as some NBFIs were charging customers higher by borrowing at lower rates, he said.
Jashim, also chairman of the Bengal Commercial Bank, also supported the idea that the market should be controlled when needed.
He cited that banks charge higher rates for foreign currencies at their discretion.
“I am the president of a bank. I am also a businessman. I should also consider the interests of businessmen.”
The IMF has repeatedly asked the BB to withdraw the interest rate imposed on the banking sector in April 2020.
He called for the phasing out of interest rate caps on loans and deposits.