The International Monetary Fund (IMF) recommended reforming the sector by eliminating regulated interest rates on loans and deposits. In response, Bangladesh Bank introduced new rules for setting interest rates last July with the aim of controlling inflation and considering the bank’s liquidity position.
The central bank adopted a new system called smart interest rates (six-month moving average rate of treasury bills), eliminating the artificially fixed interest rates of 9 percent for loans and 6 percent for deposits.
The smart rate, which was 7.1 percent in June, increased to 7.72 percent in November. Banks can add interest up to 3.75 per cent to Smart Rates, resulting in the current loan interest rate being 11.47 per cent.
Asset-Liability Committees (ALCOs) of banks set interest rates on deposits and loans by reviewing their liquidity position. Amid the liquidity crunch, a large number of banks are offering up to 9 per cent interest on deposits, with some distressed banks reportedly raising funds at 12 per cent interest.
The increase in interest rates on deposits has increased the tendency to return the money kept at home to the bank. However, despite this, credit growth continues to exceed deposits, leading to a liquidity crunch in banks.
Abdul Jabbar, managing director of state-owned Janata Bank, told Prothom Alo that there is a shortage of deposits in the market. Despite increased interest rates, the desired deposits are not becoming available, as many individuals are choosing to invest in government bills and bonds due to attractive interest rates. Additionally, loan recovery has not been as expected, leaving many banks facing liquidity challenges.