There were series of announcements in the past by the monetary authority in Bangladesh to bring interest rate to single digit by reducing the interest rate on deposit. Unfortunately, it did not work despite certain concessions to the financial institutions in the form of reducing required reserve ratios that could enable bank to advance more loans with liquidity enhancement. Now, there is an encouraging step by the Bangladesh Bank to ascertain the feasibility of single-digit lending rate with reference to the previous non-performing loans [NPL] and to ascertain whether single-digit lending rate is workable for the leading manufacturing sectors in the economy. This impact assessment may suggest an acceptable policy and pragmatic strategies to achieve single–digit rate without impairing the profitability of the financial institutions.One way to carry on the task is to calculate the correlation coefficient between the NPL and the lending interest rate in a macro way. The other is to explore the calculation in different micro ways such as for individual banks and for sector-wise calculations. Positive and significant correlation coefficients assert that indeed lower interest rate can reduce to some extent NPL. On the other hand, negative correlation coefficient represents a turnaround that a lower lending rate may increase the amount of NPL and a higher lending rate may account for low level of NPL. Thus, the negative correlation coefficient invites more queries and questions. One important puzzling question is on the soundness on the feasibility of the projects financed by the financial institutions; whether the standard criteria in selection of the projects were considered or the projects were financed on the altar of political leverage and patronization. Sensitivity analyses are crucial in any project selection exercise. It traces the implied risk factors when standard assumptions such as the variation of exchange rate or market environment distortion is considered along with many other crucial variables to recheck the feasibility criteria. When a project is financed through appropriate sensitivity analysis; the sustainability of the projects is ensured and ownership is firmly established.
The implementation of single-digit lending rate requires scrutiny on many counts – the factors that determine the deposit rate, the legal and acceptable spread and the operating and administrative expenditure. Even with the given level of spread in the neighboured of 3 percent, it may be difficult to maintain single digit lending rate with inflation very close to 6 percent. Another stumbling block is the government borrowing from the banking sector and in the face of dwindling sale of savings instruments due to 10 percent cut from the earned interest; the single-interest rate target might face indomitable challenge.
Asian Development Bank in a recent report listed Bangladesh, India and Pakistan as the top three countries with higher percentage of NPL at 11.9 percent, 11.2 percent and 8.8 percent respectively. The leverages given to the defaulters in interest exemption and rescheduling loan are spoiling the sound environment. Moreover, the drive in loan recovery is impeded through the budgetary support in each year. Thailand, the country which was devastated during the Asian Financial Crisis is a classic example to follow for many countries to reduce NPL. The performance of Thai Asset Management Corporation and Corporate Debt Restructuring Committee in reducing NPL to mere 3 percent is praiseworthy. Corporate governance is essential in restoring the health of the banking sector in Bangladesh which is still vibrant.
The writer is a Professor of Economics, United international University.
