Private commercial banks yesterday self-imposed a cap on their lending and deposit rates to check unhealthy competition in the market.

At a meeting, the Association of Bankers Bangladesh (ABB) decided to offer an interest rate of 12.5 percent on deposits and charge 15.5 percent for industrial term loans and working capital.

However, loans for consumers, home loans and credit cards will be out of the purview.

Mohammed Nurul Amin, chairman of ABB, presided over the meeting at its office in Dhaka.

Amin said at present, there is no cap on the lending and deposit rates. "Under the circumstance, we should not behave in a way that creates indiscipline."

"There should not be any sudden jump in the lending or deposit rates. We have taken the initiative to keep the hike at a rational level," he told The Daily Star.

Amin, also the managing director of NCC Bank, said Bangladesh Bank also wants to keep the interest rate spread below 5 percent.

"In line with the spirit of the central bank, we also want unhealthy competition in the banking sector to end."

He said the association of bankers, however, did not impose any written cap. "We have urged the bankers to comply with the decision, which will ensure discipline and benefit the business community."

ABB has taken the decision due to "moral suasion" by the central bank, said a member of the association.

This came a day after top officials of the central bank sat with leaders of ABB and urged them to keep the spread at below 5 percent.

BB also observed that the lending rate would never exceed 15 percent when the spread is below 5 percent.

On January 4, the central bank withdrew the 13 percent interest rate limit on bank loans, prompting the private banks to increase their lending rates.

According to BB data, 18 out of 30 private banks charged 16 percent to 18 percent for industrial loans and working capital in January.

The hike in interest rate invoked sharp criticism from the business community including the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI), the country's apex trade body.

In addition, the term deposit rates last month ranged between 11 and 12 percent. However, eight banks offered deposit rates between 13 and 14.5 percent, showed data.

Many bankers said the deposit rates could have gone up further in the coming months due to ongoing unhealthy competition among the banks on deposit rates.

As a result, the lending rate would have gone up further, they said.

"We have self-imposed the cap on productive loans and loans for essential commodities," a member of ABB said.

A senior BB official said until 2007-08, there had been no cap on deposit rates or loans since the country introduced a liberalised policy in the banking system in 1992.

The immediate past caretaker government imposed a cap on lending rates due to the global economic crisis.

While announcing the monetary policy statement in July last year, the central bank said it would withdraw the cap on lending.

When the central bank withdrew the cap in January, it said it would monitor the situation so that rates do not go up abnormally.

The Daily Star/Bangladesh/ 8th Feb 2012