Are we ready for single digit interest rate?
Central Bank has already issued circular for implementation of borrowing rate at 9 per cent from 1st April. In connection with this, recently different banks have started to reduce their deposit rate as a preparation to impose 9 per cent interest rate on all kinds of borrowings except credit card. Though government has advise the banks to implement the single digit rate of interest from last one and half years but the bankers are failed to execute the same in an excuse of lack of liquidity in banking sector.
But now lastly the banks are bound to implement single digit from 1st April, 2020 as it is imposed by the government. So, it has been in the mind of the banker that the rate will be reduced as it is a desire of the government. But, still it's a question, are the Banks ready for implementation of single digit borrowing rate of interest?
Everybody will agree that we need a strong foundation and surrounding support to make an establishment strong. Like this, transition to double digit to single digit rate of interest in overnight must need some bases to keep it continues forever. Bank is a profitable organization. So, like all other businesses, bank has to consider cost (for bank it is cost of fund) to fix-up sale price (for bank it is rate of interest on borrowing). So long, Banks are freedom to fix up the borrowing rate considering their cost of fund. But, it will not be possible from 1st April.
In Bangladesh, there are intense competitions in the banking sector among the banks. So, banks are collecting deposit by offering a wide range of deposit products which are attributed with different rate of interests. But after implementation of single digit rate of interest, the scope of offering attractive product will be squeezed as the range of deposit interest rate is very limited. So, bankers are suspecting that the mobilization of deposit may be reduced for this reason. Deposit is called life blood for the Bank as it is the source of investment.
If the mobilization of deposit reduced then automatically investment scope for the bank will be reduced. Besides, now on, like deposit product, Banks offer different borrowing products to its different customers in different rate so that it can cover up its cost. As central Bank has fixed interest rate 9 per cent for all its borrowing products except credit card so it will be tough for the bank to cover up the existing cost of fund. Until a while, we have seen that different banks had been offering different long term (3-7 years period) high cost deposit product for procurement of fund which rate cannot be reduced proportionately though the borrowing rate of all existing as well as fresh product will be reduced to single digit (maximum 9 per cent).
So, bank has to bear some high cost deposit products (double digit rate of interest) for next 3 to 7 years though rate of borrowing will be reduced from 1st April. This will ultimately reduce the profitability of the bank. Another important thing is that banking sector has mostly been suffering with the non performing loan (NPL). A bulk amount of money is still unrecoverable. NPL creates multifarious cost for the bank.
Firstly, bank does not get any income from any NPL as interest of NPL remains unrealized. Secondly, bank has to keep a certain percentage of provision (in some case 100 per cent) for covering the expected losses from NPL which has to maintain by curtailing profit or reserve. Thirdly, bank has to give interest to the depositor for the fund blocked in NPL though there is no income realize from such fund. Finally, another cost against NPL is opportunity cost, bank fails to roll on the fund as the total fund remain unrealized. If the NPL continues to rise then it will be tough for the bank to run the business smoothly as its faces serious trouble to manage income to cover the added cost. So, in normal situation, these are the different problems that bank may face, once the single digit rate will be implemented.
However, recent rumours about collapse of banks, bankruptcy of different banks, losing of deposited money, misleading information about deposit insurance act etc are like "The blow of the pit on the die." These rumours create tension among the general public and some banks are experiencing unwanted withdrawal of deposit due to such rumours. In effect of these, stock price of most of the bank has fallen in bourses. Moreover, pandemic COVID-19 outbreak will deteriorate the world economy and Bangladesh will suffer most with its effect. Banking sector is eyeing for further terrible economic downturn.
So, we are seeing that banking sector is passing really a hard time and it seems that banks are not ready for single digit rate of interest. So, what shall we do? Will the government back foot from their stand of single digit. May be not. Every problem has solutions. As single digit rate of interest is really expected for the sustainable economic development. So, both the Banks as well as Government have to work with parallel for the implementation of single digit and to create a strong base so that single digit remains forever.
Government can create equal opportunity for the different banks to procure the different government funds at zero cost. Government can give privilege to the private Banks to utilize their treasury funds. Gap between Bank's highest deposit rate and different government savings certificate may be reduced in a logical level so that bank may not face problem in deposit procurement. Unnecessary expenditure of the Bank must be avoided. The prevailing laws relating to recover the default loan must be changed immediately. Government must go in hard position against the defaulters of the Bank.
Bank money is the public money so there is no mercy for the person who embezzled the borrowing fund. If the government helps the Bank to recover the previous defaulted money, then I think bank will be relaxed to apply single digit rate of interest. The proposed Finance Company Act-2020 and Bangladesh Asset management company Act should be pass as soon as possible. Capital flight is another problem that create liquidity crisis. If the different government agencies remain active and follow the principal of "zero tolerance" regarding capital flight then economy will be boosted up.
Government may give some tax relief for the Banks for the first year so that Banks can cover its extra cost for implementing single digit rate of interest as well as negative effect of COVID-19. It gives the bank a breathing time to survive. Already Bangladesh Bank has reduced the CRR rate for the Banks which allows Bank to improve the liquidity. Lastly, central Bank as well as Government has to create such environment so that country's people can keep trust on the banking sector. If all these things can be materialized immediately then preparation for implementation of the single digit will be fruitful.
Undoubtedly, the single digit rate of interest is immense need for the growth of business as well as controlling the inflation. But it is tough to move on from double digit to single digit in an unfavourable situation without proper preparation. To make it effective we need to prepare from the all aspects.
American writer and philosopher Benjamin Franklin said, "By failing to prepare, you are preparing to fail." So, our success of implementation of single digit rate of interest will depend on our preparation for it.
The writer is banker & freelance writer, National Bank Ltd CDA Avenue Branch, Chattogram