Bangladesh Bank to introduce IMF-prescribed system to set interest rates on lending

In 2020, the central bank capped the commercial bank’s lending rate at a maximum 9 percent, which many critics believe was the flashpoint of the subsequent spiralling economic downturn

Bangladesh Bank is set to remove the ceiling of the interest rates on lending and introduce a new market-based system called interest reference rate corridor, a tool which brought considerable success in the Philippines in recent years.

Governor Abdur Rouf Talukder announced the major shift in the policy on lending on Sunday while he was addressing a session on the second day of the Bangladesh Business Summit 2023 in Dhaka.

“We have almost finalised the policy. A corridor of interest rate will be introduced based on market-based reference,” he said.

Introducing such a system was part of the prescription the International Monetary Fund came up with before agreeing to lend Bangladesh a $4.7 billion credit to give some relief to an economy facing major challenges like a massive rise in inflation, liquidity crunch, significant devaluation of currency and a drop in US dollar reserves.

In academic terms, an interest rate corridor or IRC is a system for guiding short-term market interest rates towards the central bank’s policy rate, which consists of a rate at which the central bank lends to banks and a rate at which it takes deposits from them.

In a standard corridor, the lending rate will be above the central bank’s policy rate, and the deposit rate will be below the central bank's rate.

The Bangko Sentral ng Pilipinas, the Southeast Asian archipelago nation’s central bank, introduced the IRC system in 2020 as an additional tool to manage liquidity in the financial system amid the pandemic.

Bangladesh’s central bank, on the other hand, the same year capped the commercial bank’s lending rate at a maximum 9 percent, which many critics believe was the flashpoint of the subsequent spiralling economic downturn as the amount of non-performing loans began to rise to its current monumental height since then.

In 2020, Bangladesh’s non-performing loans were 7.6 percent of the total outstanding loan, which swelled to 9.36 percent by the end of 2022.

The embattled Bangladesh economy’s already sickening heath turned worse when the global economy entered into a period of inflation as a result of a war in Eastern Europe that began earlier last year with no possible ending in sight, coupled with the devaluation of the Bangladesh Taka against the US dollar due to US Fed’s decision to increase the interest rate.

Since the beginning of last year, analysts and insiders have been recommending that the Bangladesh Bank withdraw the lending rate ceiling, but the central bank has paid no heed to those recommendations until now.

Commercial banks, of their own accord, raised the interest rate to attract deposits, but they could not do the same regarding lending rates due to the central bank’s strict stance on the matter, which many believe was at the behest of a powerful business lobby.

Bangladesh Bank had started to soften its position since the international lender entered the fray, which set a timeline by July this year to withdraw the lending ceiling for good and introduce the Philippines-style IRC.

FEATURES OF IRC BB PLANS TO LAUNCH

Governor Talukder, while addressing a plenary session titled ‘Long-Term Finance’ at the Bangabandhu International Convention Centre in Dhaka’s Agargaon, said Bangladesh Bank plans to roll out the IRC system soon.

Officials at the central bank confirmed to bdnews24.com that it would set a base interest rate on lending which prevailing market conditions will determine. A maximum ceiling of interest rate will also be set for commercial banks, which will control the lending rate offered by commercial banks, which is called the reference rate.

Along with the IRC, Bangladesh Bank has been actively controlling inflation and formulating a single exchange rate.

Currently, the central bank is following multiple exchange rates of foreign currencies for import, export, remittance and cash transactions.