The private commercial banks (PCBs) were shown as earning high operating profits in recent years. If the banks scored this substantially higher profits from increasing notably their credit disbursement or funding a large number of new borrowers and helping them with entrepreneurship, then the same would be well earned indeed.
Banks profiting from extending resources to entrepreneurs or enterprising means their playing a facilitating role in economic growth. Economic growth occurring, thus, not only underwrites the security of the economy, it does the same for the banks.
From acquiring additional customers or expanding their client base, the banks only add to their resourcefulness over the long haul. The growing customer base means expansion of the banks’ business well into the future. But according to statistics of the Bangladesh Bank (BB), credit growth in commercial banks has been decreasing in recent times.
So, the banks have not got their markedly increased profits in the desired way, i.e. through energizing the wheels of the economy. The greater part of the increased profits of the banks came from their management maintaining their hard squeeze on their existing customers to repay their debts to the banks at the high lending rates fixed earlier. Not only the high rates of interest on borrowing were retained, the rates were also moved up further.
The high interest rate on borrowing helped the short term profit hunger of the banks . But this high profit trend for now will likely be at the cost of their longer term profitability or viability .Businesses or potential entrepreneurs never like a high bank borrowing rate.
Existing customers of the banks are, no doubt, servicing their old debts at the high interest rates which is helping the banks to show high operating profits. But what about the future ? Businesses are presently showing a disinterest in taking bank loans at such high rates of interest. Specially, this mood is deepening in the background of the corona pandemic when business activities have not revived fully or business confidence has not been restored up to expectations or need. As it is, Bangladesh Bank (BB) has been admonishing the banks to supply credits liberally to their customers or would be customers.
The ones who would like to try their hands at business through bank finance, they are sitting on the fence, watching. They will not opt for investment operations till the banksactually push down their interest rates on borrowing. Thus, on the whole, additional investment operations are slowing down as a result of the high cost of banking funds. In the longer run, this could have adverse repercussions on the economy from reduced investments.
Two factors are contributing to the banks’ unwillingness or inability to decrease their lending rate. One is their unbridled operating costs. The other is seen as sheer greed on the part of their owners or management. Both are capable of being cut short from the management embracing ideas that would be best for the long term health of their institutions.
Operating costs can certainly be pruned through conscious policies and their efficient implementation. As for greed, the owners-management should see the very sensible point of controlling the same from taking a hard look at how far they can go with high interest rate on borrowing without hurting their long term interests.
The Bangladesh Bank (BB)appears to have become truly conscious only from 2019 of the imperative to push down the lending rate. From April of last year, it issued directive that no PCB ought to charge more than 9 per cent interest while lending while 6 per cent was fixed as maximum interest to be given for receiving deposits. However, it remains to be seen how far these stricter guidelines are being actually followed.
Reportedly, BB’s persuasive advices to the banks on these matters have gone largely unheeded in some cases. Therefore, it needs to step harder on the pedal. Most of the PCBs used to maintain a difference of much over 5 per cent in the spread of interest between lending and receiving of deposits. Some banks had spreads ranging in the double digitsfavouring mainly lending. The international standards for this spread is between 2 to 3 per cent only.
BB should use its authority and dictate a spread conforming to the international standard to be followed by the PCBs. It should at least enforce its declared guideline of a 9 and 6 per cent spread, rigorously.
Presently, banking deposits are also taking flight considerably from the low interests received against deposits. While this process is not hurting the banks in their present positions, it could be a worrying factor over the long run.
But BB’s fixing of a reasonable yield against deposits can solve this problem. Steps taken by BB for facilitating adjusting upwards interests on deposits, should help in the meeting targets of deposit mobilisation by the PCBs. But this has to be a delicate exercise without ‘unduly’ widening again the present aspired spread of interest between lending and deposits.
