‘Single digit rate on loans may decrease banks’ profitability’

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Banks may feel discouraged in disbursing small and medium enterprise (SME) loans, as single digit interest rate on bank loans is implemented,” said Syed Mahbubur Rahman, managing director at the Mutual Trust Bank and former chairperson of the Association of Bankers, Bangladesh (ABB), in an interview with Mehedi Hasan of DhakaTribune.He also talked on issues concerning the present situation of the banking sector and challenges that the implementation of 9% interest rate on lending and 6% interest rate on bank deposits may pose

How would you evaluate the banking sector in 2019?

Last year, the banking sector as well as the country’s economy was a matter of concern. 

With the non-performing loans increasing at an alarming rate, loan-rescheduling hitting a record, both exports and imports showing negative trends, and the government borrowing from the banking sector increasing, the overall situation in the banking sector wasn’t good.

Private sector credit growth dropped to single digit in November; it was something quite unexpected and caught me by surprise. 

However, remittance inflow has been positive, increasing by 25% in the first half of the current fiscal, thanks to the 2% incentive. 

What are the challenges in implementing single digit interest rate?

To implement the single digit interest rate on lending, we, first of all, must collect deposits at 6% rate of interest, which may prove to be very difficult in practice.

We presently collect deposits at 8% to 9% interest rates; some of the banks collect deposits at 9% to 9.30%. 

If we start offering depositors 6% interest rate, they might withdraw their money from banks. Instead of depositing their money in the bank, they may prefer other investment options such as investing in gold or land. 

Non-Banking Financial Institutions (NBFI) and new banks will face liquidity crisis, as a result. Even, most of the banks will face difficulties to survive.

I think impact of a single digit interest rate on lending on the profitability of banks would be adverse, if the current deposit situation continues.

Export-import and remittance earning would suffer, as well.

The banks might be discouraged, especially in disbursing small and medium enterprise (SME) loans  as the supervision costs of loans in the sector is higher as compared to other sectors. 

What do you ask for to implement single digit lending rate?

We will be able to implement the rate easily, provided we get large-scale deposits from the government organizations. However, not all the banks will get the deposits.

First of all, the government should ensure 6% interest rate on commercial bank deposits.

What is the current status of Mutual Trust Bank?

Mutual Trust Bank is a third generation bank, operating successfully for 20 years. I ensure that the bank runs under good governance. The ‘board of directors’ of the bank is very professional, and does not interfere with the bank’s management.

I think the bank will do better in future. 

Do you think loan rescheduling is the only way to reduce NPLs? 

Rescheduling and restructuring loans are happening worldwide. It is not bad for banks. 

However, in our country we are rescheduling and restructuring the bad loans with the purpose of cleaning up and reducing the bad loans in paper without any scrutiny. 

As a result, the amount of non-performing loan is not actually decreasing. 

In the short time, loans rescheduling helps the banks clean up the book, but in the long run, it increases the defaulted loans.

Exemplary punishment should be ensured against defaulters. Some regulatory issues and laws should be changed. Good governance and political willingness are very much important to reduce the high amount of non-performing loans. 

Nepal, a small economy, has set an example for us in this instance.   

Over the past several years the banking system has been changing. What do you think banking in future would look like?

Banking system will change further, while keeping pace with the country’s businesses. 

In this case, technological development will be an important factor, which will reduce employment. So, the banks should concentrate on the small and medium enterprises (SMEs) and labor intensive industries.

We should also make use of technological development in banking sector. We need vary efficient system for reducing the cost of operation and increasing profitability.

What are the challenges for our economy in 2020?

We should gear up our exports for sustainable economic growth. Export diversification and new market exploration are important. 

We should move towards a surplus ‘current account balance’. A deficit balance current account balance will create pressure. 

Private sector investment should increase for a sustainable GDP growth, and the government should emphasize job creation.