Banking sector decline linked to 2010 single-digit lending rate policy: White Paper
Between 2001 and 2019, GDP growth doubled, underlining the critical importance of private-sector lending
Bangladesh's banking sector began to deteriorate in 2010 when the government introduced a single-digit 9% interest rate for lending, according to the final draft of the White Paper on the State of the Bangladesh Economy.
As of last June, the total assets of banks in the financial sector stood at Tk25.46 lakh crore, representing 47% of the country's gross domestic product (GDP). Bank deposits amounted to Tk18.41 lakh crore, or 34% of GDP, said the 400-page document, which was unveiled at a press conference yesterday (2 December).
Between 2001 and 2019, GDP growth doubled, underlining the critical importance of private-sector lending. However, the banking sector, which had been gradually strengthening, began to spiral out of control primarily after 2010.
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The report attributes this decline to temporary and hasty policy changes by regulatory agencies and the government, which resulted in misguided lending practices.
Significant policy shifts included fixing the market-based interest rate at 9%, introducing the smart rate system, providing collateral-free loans during the Covid-19 pandemic, and adopting the crawling peg system in the foreign exchange rate regime.
In April 2020, following discussions with private bank entrepreneurs, the then Finance Minister AHM Mustafa Kamal announced the 9% interest rate cap on bank loans. At that time, interest rates in the banking sector had reached as high as 22%.
After entering into a loan agreement with the International Monetary Fund (IMF) early last year amidst a financial crisis, Bangladesh Bank gradually increased interest rates.
The White Paper reveals that the fixed rate was, in effect, market-based only on paper. It also highlights a turning point in governance when the Awami League government was ousted during the student-led public uprising on 5 August, paving the way for an interim administration.
Following the government change, financial regulatory agencies' leadership was overhauled. The implementation of IMF conditions and the elimination of previous policies commenced.
To address the poor state of the financial sector, the central bank has raised its policy rate by 525 basis points since May 2022.
The current policy rate stands at 10%, which is expected to help control inflation.
The average lending rate in the banking sector is now around 12%, with some cases reaching 14%.
Despite introducing a single-digit interest rate, the report reveals that most loans issued after 2010 have turned into defaults. The ratio of defaulted loans currently stands at 12.5%, amounting to Tk 2.85 lakh crore.
