Asked by
Birds of the sky (2 Golds)
Sunday, 12 Jan 2020, 12:41 PM
at (Miscellaneous
Classes)
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Focus writing: Single digit Intetest rate Interest on deposits and loans is one of the important tools of the modern banking system. It greatly impacts the economy. The higher the rate of interest on loans the lower will be the investment and thereby it will negatively impact the economic growth. That’s why in general, lower rate of interest is expected to build a healthy economy and keep up the positive growth of the economy. In last couple of months, “single digit rate of interest” is the talk of the town in our economy. Government to general public, everybody is worried about the double digit rate of interest and everybody is hoping that the rate of interest in our Banks will go down to single digit. Though almost a year has already passed after the government’s declaration of single digit rate of interest, but still banks could not implement the government directives in full, except the state owned Banks. Rather, we have experienced trend of increasing interest in last couples of months. Bankers are now the villain, as they failed to bring down the rate of interest. But, there are reasons behind it. It is not possible to bring down the rate of interest overnight from double digit to single digit by government order. Are bankers reluctant to bring down the rate of interest to single digit? Or are there any other reasons that create barrier to single digit interest rate? It should be cleared to the people because the people of the country are directly and indirectly clients of the Banks and everybody are affected by the higher rate of interest. To know the problems we have to first understand what is interest and how it is determined. Simply, interest is the return or cost or profit or price for capital or money invested anywhere or it is the rate for time value of money. People who come to the bank for depositing their money wants benefit or profit or interest for the time period, they want to keep the deposit. On the other hand, people borrow money from the bank pay interest or profit or cost for the money borrowed for the specific time period. We know that Banks borrow money from the depositors at a specific rate of interest and lend it to the borrowers at an interest rate higher than the rate they offer to the depositors. Difference of both the interest (Lending rate of interest-Deposit rate of interest) is called spread. Banks profit is the net amount remains after deducting the operating cost from spread (i.e. Profit= Spread-operating cost). So, Banks’ profit as well as spread will not be hampered if both the deposit rate of interest as well as lending rate of interest go down to single digit proportionately. It means that there should be no objection from the bankers’ side for reducing both deposit and lending rate of interest proportionately. Then why the rate of interests is still in double digit? Actually, interest rate is a market entity determined by equilibrium of the demand for money and supply of money. According to economics, if the demand for money is greater than the supply of money, then the rate of interest will be higher. Here demand for money means demand for funds for loans or borrowing by individuals, business and corporate bodies, different government agencies, etc., and supply of money means deposits from individuals, business entities, corporate bodies, government agencies, etc. Banks take deposits from the supply side and lends to the demand side. If Banks can take deposits at lower rate, then they can lend at lower rate also. Banks add spread with the deposit interest rate to determine the lending rate. That means, rate of interest of deposit governs the lending rate and this is the main concerns of businessmen to bring down the lending rate to the single digit. But, this is only possible if the rate of deposit goes down to single digit. So, it is clear that at present in Bangladesh interest rate of deposit is high for which the borrowing rate is also high. Now, let us find out the different reasons for high rate of deposit interest in Bangladesh. 1. Huge gap in interest rate and benefit between Government Savings Certificate and Bank deposit interest rate: Government borrow money from the individuals for performing different development works by issuing Savings Certificate (Sanchaypatra) which have highest rate, in double digit and greater than the Bank’s deposit rate. This savings product is very attractive to the depositors and so depositors are interested to deposit by purchasing Savings Certificate rather than depositing in the Banks. Besides, investment in Savings Certificate also gives the depositors benefit of tax rebate which is not available by depositing in the Bank. Without this benefit, Banks deduct source tax at a rate of 10 per cent (for TIN certificate holders) and 15 per cent (for those without TIN certificate) from the interest income of the depositors which is flat 5 per cent (recently revised to 10 per cent) only in Savings Certificate for all sorts of depositors. For this reason, last few years Banks experienced loss of their deposits to Savings Certificates. This is one of the reason for which Banks have to increase their deposit rate of interest for collecting deposits competing with Sanchaypatra rate of interest. 2. Competitive Market: In Bangladesh, banking sector is too much competitive. There are too many Banks compared to the economy. There are near about 60 Banks working in the market. All Banks are vigorously working to get deposits from the market. Demand for money is higher than the supply of money. This also led to increase in the rate of interest of deposit. These are the reasons for high and fluctuating deposit rate of interest. Gap between Savings Certificate and deposit rate of interest of the Bank should be minimised, as well as Bank deposits may be encouraged by giving facilities like tax rebate or lowering source tax on deposit income. If the government funds are made available for the private commercial Banks at lower rate of interest like state owned Banks then crisis of deposit will be reduced. Besides, policy may be adopted to make all financial transactions of all class of people through banking channel by making popular and easy debit/ credit card, mobile banking, fund transfer, etc. It will help to mobilise the money through banking channels as well as make all transactions transparent. In addition to it, a good portion of black money is rolling outside the banking channel. As these are part of the economy, so government should take some policy to include the black money into the banking channel or reduce black money holdings to zero level by executing laws perfectly. All these can help to reduce liquidity problem of the Banks. Though the rate of deposit interest is the main factor that fluctuate the rate of borrowing, but, there are some other reasons which are also responsible to increase the rate of borrowing. Among these, number one is NPL (Non performing loan or loan on which interest income is suspended due to non-payment by the borrower). Due to increase of NPL, Banks lose the probable income from their investments, on the other hand Banks have to keep provisions for the NPL from the operating income which increases the cost of fund. On the other hand, Banks have to pay interest to the depositors for the amount they have taken as deposits which include amount of NPL. So, Banks face multifarious losses if any of their investment turns to NPL. Banks try to cover the losses from the performing loans by increasing rate of interest of the loans. In recent days, NPL of the entire banking sector has been increasing alarmingly. So, there is no other option rather than reduction of NPL. Laws relating to the recovery of the classified loans should be revised and updated. Banks have to boast up the recovery process and be cautious in disbursing loan. We should come out from the culture of NPL. It’s a cancer for the banking sector. If we can solve all the problems stated above, we can easily proceed to the single digit rate of interest and this is necessary for our economy to become a developed one. Government of Bangladesh is very much concerned in this matter and they are working together with the Banks, as well as different stakeholders, to drive in the highway of single digit interest rate. Answered by Birds of the sky (2 Golds) Sunday, 12 Jan 2020, 12:42 PM |