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BB keeps on tightening monetary policy
Uptrend in lending, deposit rates may continue
Siddique Islam
12/29/2005
The upward trend in interest rates on both lending and deposits in the banking sector is likely to continue in the New Year as the central bank keeps on tightening its monetary policy.
"The interest rates on lending and deposit may increase further in the next month if the demand for fund continues at the current level," former Deputy Governor of the Bangladesh Bank (BB) and Managing Director of the Pubali Bank Limited Khondkar Ibrahim Khaled told the FE Wednesday.
He also said the interest rate on lending has already risen by around one percentage point in the past two months.
Currently, most of the banks are following upper limit of the middle rate system to minimise their cost of funds, sources in the banking sector said.
Under the existing middle rate (mid-rate) system, the banks are allowed to maintain a spread of 1.5 percentage points on both sides of the announced rates for the various sectors.
Earlier, the central bank enforced a middle rate system for fixation of lending rates by the banks replacing the band system to ensure accountability in transaction.
However, eight more commercial banks have already raised their interest rates on deposits around one percentage point with effect from early this month.
The banks took the measure for adjustment in the advance deposit ratios for stabilising their fund positions, sources in the banking sector said.
The banks, especially private commercial banks (PCBs) and foreign commercial banks (FCBs), have re-fixed their interest rates on deposits for particular tenures, such as three months, six months, one year, two years and three years fixed deposit schemes.
The interest rates on savings account remained unchanged at the level of 2.50-8.00 per cent, the sources noted.
The banks that have already revised their interest rates on deposit rates are South East Bank Limited, One Bank Limited, EXIM Bank Limited, Bank Asia Limited, Shahjalal Islami Bank Limited, State Bank of India (SBI), National Bank of Pakistan (NBP) and Citibank N.A.
The interest rate on deposit may increase further in the near further to meet the growing demand for liquidity in the banking sector.
"The interest rates on deposits will increase further to attract flow of funds into the banks," a senior bankers of a commercial bank said.
He also said that the banks have no option but to increase the interest rates on deposits because the government has already raised the interest rates on its savings certificates.
Earlier, the government revised the interest rates on national savings schemes upwards by 1.50 percentage points and doubled the investment limits of those schemes, excepting pensioners savings certificate, to make the investment tools more attractive.
On the other hand, the announced interest rates on lending are almost steady compared to the previous month because the banks maintain upper limit of the middle rate system.
Only two banks out of 48 have revised their lending rates this month. One PCB increased its lending rates while a FCB slashed its interest rates on lending.
Currently, the banks offered their lending rates on working capital between nine per cent and 15.50 per cent while export credit is fixed at seven per cent, sources in the BB said.
The banks, however, sanctioned loans to large and medium scale industries at interest rates in the range between nine per cent and 15 per cent.
Besides, they charge rates on small industry between 10 per cent and 22.50 per cent.
The lending rate on housing loan is charged between 11 per cent and 15 per cent while consumer credit is offered at 12.00 per cent to 18.50, the sources noted.
The lending rates on consumer financing are likely to increase from the next month mainly due to hike in the ratio of general provision for the consumer financing.
Earlier, the central bank raised the ratio of general provisioning to five per cent from two per cent against unclassified loan amount for consumer credit.
The revised ratio of general provisioning will come into effect from January 1 next.
The central bank has been maintaining a tightened monetary policy for minimising the credit growth, particularly in the private sector, to ease the inflationary pressures on the national economy.
Credit to private sector has marked a significant rise by 3.40 per cent in the first quarter of the current fiscal compared to the same period of the previous fiscal.
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