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Future of BANK's interest rate in Bangladesh

Economics

hello everyone my name is Amit and this short artical represents bank's future interest rate both as an investor and borrower prespective. hopefuly it will be helpful to readers. 

It is probably not unknown to all of us about the importance of banks for developing economy like Bangladesh. Our economy is highly dependent on banking sectors. Plenty of investors like to invest their money in banks as FDR, CD, SD and other schemes. On the other hand, large numbers of businesses are taking loan from bank for running their operations and expanding their business purpose. Every year banks play the major role in financing deficit amount of government’s fiscal budget. Therefore it is important to have idea what is going around this sector.

Most commercial banks are borrowing money from investors at 7%-8% interest rate and lending money at 13%-14% interest rate. The gap, known as banking spread, is the income of banks. However in near futures, this borrowing rate may decline to some extend so to lending rate. Following issues will be playing some impacts on declining interest rate if it occurs.

Ø  Recently Bangladesh Bank (BB) has increased call money rate from 3%-4% claiming that all conventional banks have sufficient capital adequacy and significant recovery of bad loans which represents that banks have plenty of liquidate money to invest. However on the other hand we are hearing that bank’s profitability is not increasing rather decreasing. The main reason behind it is not having sufficient productive sectors to invest which is pretty concerning issue. Of this scenario tends to continue, banks will discourage for further borrowing, As demand will be falling, it will lower the borrowing interest rate.

Ø  Inflation plays a vital role in determining the interest rate. If an economy has high inflation, financial institutions will have to offer high borrowing and lending rate. However from 2-3 years, our inflation is declining and in upcoming periods, it has possibility to decline. Therefore it will lower borrowing interest rate.

Ø  Bangladesh Bank (BB) has recently decided to lower banking spread so that businesses get money from bank at lower interest rate. Currently there is approximately 4.77% spread. If this spread is lowered, both borrowing and lending rate will be reducing.

Ø  BB has given instructions to other commercial banks to lend money to small and medium enterprises (SME) for their expansion. However one of the prime obstacles is high lending rate which increases cost of capital to SME sectors. Our finance minister has suggested to banks to lower down interest rate to single digit to boost up SME sector. In order to implement this, banks will have to lower both their borrowing and lending rate because it is profit for which banks are running their operation.

Therefore it can be predicted that interest rate of banks in Bangladesh is going to decline.

Impact to individual investors:

Individual investors will earn less than before while investing money in banks. It may motivate to some investors to move to capital market (stock market, bond market, mutual fund market) for having extra return which may boost up capital market.

Impact to business/organization:

Business will be going to get money at lower interest rate. In this way business will be expand so to our GDP and it will create many job opportunities.

 

 

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