Sajjadur Rahman

Funds have become costlier as banks have hiked their lending rates overnight in the wake of a significant rise in deposit rates and the central bank's lifting of the lending rate cap on some sectors.

Businessmen said a sudden hike in lending rates will have a negative impact on their businesses. They said an increase in costs will limit the small and medium enterprises' (SMEs) profitability and ability to grow.

Bankers said they have no option but to hike the lending rates as the deposit rates and cost of fund have gone up since December 2010. They, however, said higher borrowing costs will help contain the rising inflation.

“Personal, SME and trading loans have become costlier,” said Helal Ahmed Chowdhury, managing director of Pubali Bank.

Chowdhury said: “SMEs need higher supervision that involves costs. We can't fund SMEs at the present rates of 14-15 percent.”

Muhammad A (Rumee) Ali, chairman of BRAC Bank and a former deputy governor of the central bank, has backed the recent hike in lending rates, saying it would help check inflation.

“Cheap money helps fuel inflation and the interest rate is a major tool to tame it,” Ali said, adding that money was made cheaper while setting a cap on major areas two years back.

The central bank in April 2009, capped the ceiling on lending rates in five specific areas -- agriculture, term loan and working capital to large and medium-scale industries, housing and trade financing -- at 13 percent to help the economy mitigate the impact of the then global financial crisis.

Banks' costs of fund have gone up significantly in the past few months. Some banks offer 13 percent plus interest for deposits and, still many bank managers look desperate to collect deposits.

Meanwhile, the BB also lifted the lending rate cap in all sectors except two -- agriculture and industrial term-loans.

To take the chance, all the private commercial banks and major foreign banks have hiked their lending rates by 1-3 percentage points since the beginning of this month.

A borrower, who took a loan from a private bank at 14.50 percent interest rate in November, was informed by his bank on April 3 that he has to pay 18 percent interest for the loan.

“I want the Bangladesh Bank to look into the mater,” said the grieved businessman.

“If the pressure on deposits continues, there will be no way but to raise the lending rates even for the SME loans,” said the BRAC Bank chairman. The bank has already increased the lending rates for corporate loans.

The Federation of Bangladesh Chambers of Commerce and Industry pleaded the central bank to re-impose the lending rate cap for the sake of the industrial expansion. The apex trade body fears that higher borrowing costs will add woes to entrepreneurs.

But the central bank rejected the plea, saying it does not want to re-impose the cap at this moment. Nazrul Huda, deputy governor of the central bank, said banks will now feel encouraged to invest their funds in real sectors such as industries and services, instead of stockmarket.

Nasreen Awal Mintoo, president of Women Entrepreneurs Association of Bangladesh, said they get increasing complaints of charging higher interests rates by banks recently.

Despite the lifting of the cap, credits at a reduced rate of interest, 7 percent, are being provided to all areas of export credit operations since January 2004.

Besides, the lending rate on import financing for eight essential food items -- edible oil, gram, pulses, peas, onion, date, fruits and sugar -- remains unchanged at 12 percent.

sajjad@thedailystar.net

News: The Daily Star/ Bangladesh/ 18-Apr-2011