Economy Desk: The central bank has adopted a strategy to increase the interest rate on loans to control the rise in inflation. As a result, the interest rates on all types of loans in banks and financial institutions are increasing at an unbridled pace.
In the last seven months, interest rates on import and commercial loans have increased by over 4 percent, and interest on term loans to the industrial sector has increased by over 5 percent.
Interest on loans to the pre-shipment sector in exports rose by more than 8 percent, EDF interest more than doubled, and interest on agricultural loans increased by more than 4 percent. At the same time, interest on loans in financial institutions has increased by more than 6-7 percent.
Excessive interest rate hikes have increased the cost of business and industry. At the same time, the prices of products are increasing. On the one hand, the country’s products are facing intense competition in the export market. Similarly, the competition in the country’s market has become more difficult.
Apart from this, the consumer’s purchasing power has decreased due to the increase in product prices and the economic recession. As a result, net sales decreased. This has reduced the flow of cash into industries and businesses.
On the one hand, the provision of revenue to the government from the private sector has decreased; on the other hand, the flow of money to businessmen has decreased. Entrepreneurs are also under pressure to repay bank loans.
In the face of strong demands from entrepreneurs, the loan interest rate has been capped at 9 percent as of April 1, 2020. At that time, the interest rate on export credit was kept unchanged at a maximum of 7 percent.
At that time, the interest rate on term loans for agricultural loans and industrial loans was brought down to 8 percent. From then on until June 30, 2023, the loan was available at the same rate. However, interest rates on loans in some sectors, including consumer loans, have been increasing since 2023.
International Monetary Fund (IMF) loan conditions forced the central bank to lift the loan ceiling. As a result, the loan ceiling of 9 percent was withdrawn on July 1.
At the same time, it imposes a corridor or base interest to make the interest rate market-based. Through this, the interest rate of the loan will be determined by adding a portion determined by the central bank to the average interest rate of the government’s six-month Treasury bills.
Interest has been determined in this manner since last July. This rate has been increasing since that time. In between, the IMF pushed for the use of monetary policy to control inflation. As a result, the central bank took steps to increase all types of interest rates, including the policy interest rate, to increase the loan interest rate.
At the same time, it adopted a policy of reducing the flow of money in the market by following a contractionary monetary policy. This policy has been going on for the last two consecutive years. In this case, the flow of money in the market has decreased and the interest rate has increased.
In September last year, the average interest rate on the government’s six-month Treasury bills was 7.20 percent. Now it has increased to 9.61 percent. At that time, its interest rate increased by 2.41 percent.
In the same period of time, the rate of addition of base interest fixed by the central bank has also increased. In determining the interest rate last July, there was a condition for determining the interest rate by adding a maximum of 3 percent for general loans and a maximum of 2 percent for agricultural loans to the average interest on Treasury bills.
Now there is a condition for fixing the interest rate by increasing it to 2.5 percent in the agriculture sector and 3.5 percent in general loans. This rate was increased last December to add 4 percent to general loans and 3 percent to agricultural loans. In February, the central bank cut the benchmark interest rate by 10.25 percent as interest rates on Treasury bills rose sharply.
Under the new system, the general loan interest rate has increased to a maximum of 13.11 percent. This rate was 9 percent before last July. The interest rate in this sector has increased by 4.11 percent. During the same period, the interest rate on term loans in the industrial sector increased from 8 percent to 13.11 percent. The interest rate in this sector has increased by 5.11 percent.
Interest in the trade and import sectors was 9 percent until last June. Now it has increased to 13.11 percent. In those seven months, the interest rate in this sector increased by 4.11 percent. The pre-shipment loan interest rate has increased the most in the export sector.
A Rs 10,000 crore fund has been set up as an alternative to the Export Development Fund (EDF) on January 1, 2023, to finance the pre-shipment of export aid. Loans were to be given at 4 percent interest from this fund. Its interest rate has been increased in several steps, and now it is 12.11 percent. The interest rate in this sector has increased more than three times, i.e., 8.11 percent.
The export sector was earlier given foreign currency loans from EDF at 2 percent interest. As that money is brought into reserve, its size is reduced. At the same time, the interest rate has been increased to 4.5 percent. Interest in this sector has increased more than twice—that is, two and a half percent.
In this context, the entrepreneurs said that the country’s export sector is already facing intense competition. Export orders are falling due to the global recession. Due to the increase in interest rates, the production cost of goods is increasing. This has increased competition in foreign markets.
Also, the dollar has played a major role in increasing the cost of doing business. As the cost increases due to the increase in the price of the dollar, the business trade is also affected by the dollar crisis.
Especially the import-dependent industries are now in dire straits. In this regard, the cost of this sector is increasing as the interest rate increases. The value of the dollar has increased by 28 to 48 percent in the last two quarters. It has also increased the cost of doing business.
At present, the main reasons for the increase in the inflation rate have been identified as the increase in the price of the dollar, the price of goods in the international market, and the increase in the price of goods in the domestic market. Due to the increase in interest rates, the pressure on this sector will increase. As a result, there will be pressure on inflation.
A major contribution to the economy comes from the agricultural sector. The loan interest rate in this sector was 8 percent earlier. It has increased to 12.11 percent in the last seven months. Its interest has increased by 4.11 percent during the period under discussion.
Consumer credit plays an important role as a supporter of industry and commerce. Consumers on this loan purchase industrial products. Increasing the interest rate in this sector will reduce the debt. As a result, product sales will also decrease. Earlier, the interest on consumer loans was 9 percent. Now it has increased to 14.11 percent. Interest in this sector increased by 5.11 percent.
Loan interest rates have increased in banks as well as in non-banking financial institutions. The general loan interest in this sector was 9 percent in June. Now it has increased to 15.11 percent. During that time, the interest increased by 6.11 percent. The interest rate on consumer loans in this sector increased from 9 percent to 16.11 percent during the same period. Interest increased by 7.11 percent.
According to sources, official interest is charged at that rate by banks and financial institutions. Apart from this, various financial fees or commissions are also being charged along with interest. The interest rate is increasing.
Entrepreneurs say interest rates are being hiked to control inflation at a time when the country’s economy is in recession. Such an abnormal rise in interest rates is increasing the cost of doing business even before the shock of the global recession is over. In this way, the price of products is increasing, which puts the products of Bangladesh in the face of more competition in the domestic and foreign markets.
Meanwhile, due to Corona and the global recession, there was an opportunity to discount the loan installments until last December. Since then, the loan installments have had to be paid. Due to the dollar and interest, the cost of production of the product increased and sales decreased. In this way, the flow of money to entrepreneurs is also less. As a result, many people are facing problems paying the loan installments.
Meanwhile, central bank sources said that the central bank has already reduced the base interest rate by 25 percent due to the fear of increasing the rate in the current method of interest rate calculation. The focus is on not increasing the interest on Treasury bills.
Interest rates on deposits in commercial banks have increased. Especially in small banks, this rate has increased to 12 percent. In financial institutions, this rate is 12.11 percent. If the deposit interest increases, the loan interest rate will also increase.
