BB steps in to arrest rising interest rate

  • Banks can’t change lending rate if interest rate is stated fixed

  • Banks can’t increase flexible lending rate more than once a year

  • They must notify borrowers at least 3 months before increasing rate

  • Banks will reduce interest rate spread to 4pc

 

The Bangladesh Bank yesterday took a number of initiatives to rein in the rising interest rate that is creating unwanted pressure on borrowers and businesses.

For instance, banks will not be able to change the interest rate on loans if the credit agreement mentions fixed interest rate.

The interest rate can be changed if the loan agreement states floating or flexible rates. But no bank will be permitted to increase the flexible lending rate more than once a year.

Banks will have to give notice to borrowers at least three months before increasing the lending rate. They can increase the rate by a maximum of 0.05 percent for term loans and 1 percent for working capital and other loans in a year.

In another notice yesterday, the central bank asked banks to maintain the interest rate spread, the gap between the interest rates for credit and deposit, within 4 percent, down from the previous ceiling of 5 percent. The central bank said banks were frequently increasing the interest rate on their different credit products, which created a horrible situation in the banking sector.

The latest lower ceiling of the interest rate spread will stop banks from raising the interest rate.

The central bank also said that some banks had recently increased the interest rate illogically on loans that were disbursed earlier considering the rising trend of rate in the global and the local market. Such rate hike will create an unexpected pressure on borrowers, impact their loan repayment capability and have an adverse impact on their investment and production decisions.

The latest moves are expected to bring credit discipline in the banking sector and insulate it from fresh loan defaults, according to the BB.

The rising trend of lending rate will be arrested because of the central bank’s latest initiative, said Syed Mahbubur Rahman, chairman of the Association of Bankers Bangladesh, a forum of private banks’ chief executive officers.

“With this policy, banks will not be able to increase the rate as they wish,” said Rahman, also the managing director of Dhaka Bank.