The Financial Express

Bad loan, high inflation inflate interest rates

Wide interest spread raises cost of credit, curbs investment and economic growth, says study

| Updated: December 26, 2017 11:18:49

Picture used only for representation. Picture used only for representation.

Bad loans and high inflation jacked up bank-interest rates persistently until recently, thus inflating cost of credit and deflating investment and economic growth.

A researcher placed such findings in a concluding-day session of the Bangladesh Economic Association (BEA) that shed light on the latest state of Bangladesh's economy, predominantly on banking and finance, growth, employment and morality of management.

The research paper says lending rates and interest-rate spreads remained much higher in Bangladesh than in any advanced nations, indicating that there remains a scope for cuts.

The researcher, Khan A Matin, formerly professor at the Institute of Statistical Research and Training of the University of Dhaka, used panel data 2010 to 2015 of 47 commercial banks to draw the conclusions.

In the meantime, the average interest spread as of last June stood less than 5.0 per cent while the lending rates around 10 per cent.

The lending rates usually remain lower for the agriculture sector and SMEs and higher for consumer loans and industrial financing.

Painting such a picture of the banking world in the report, styled, interest- rate spread in the banking sector of Bangladesh, the author also listed the reasons.

He said the cross-country analysis suggests that the main drivers of lending rates and interest spreads in the country are inflation, nonperforming loans, and low recovery ratios for bad loans.

He noted that interest-rate spread is considered an important determinant of the efficiency of the financial system as large spread works as an impediment to expansion and development of the financial intermediation.

"It has often been argued that higher the spread, the higher would be the cost of credit to the borrowers for any given deposit rate."

He said a wider spread means unusually lower deposit rates, discoursing savings and limiting resources available to finance bank credits.

The professor of statistical research said a high interest-rate spread raises the cost of credit, restricting the access of potential borrows to credit market and thus reducing investments and limiting growth potential of the economy.

He suggested a reduction in inflation on sustained basis through prudent monetary and fiscal policies.

"Strengthen bank governance, particularly in the state-owned banks, to help improve asset quality," the research report reads.

As one of the ways out of such adverse cycle in banking, it stressed the need for improvement in contract enforceability and judicial proceedings for loan collection, foreclosures and the recovery of collateral.

"Minimise or eliminate the practice of forced subscription to treasury bills and bonds, replacing it with a fully-functioning auction-based approach," he further said about the dos on part of the bankers and financial policymakers.

Dr Toufic Ahmad Choudhury, director-general of the Bangladesh Institute of Bank Management (BIBM), moderated the session where other papers on the problems and solutions on the economic front were also placed.

The papers were on 'due diligence in Bangladesh monetary and credit programmes: path derivation' and 'does private-sector credit gear up private investment in Bangladesh?'

Professor of Dhaka School of Economics Dr Muhammad Mahbub Ali presented a paper on the testing hypothesis on theory of social networking, community banking and empowerment of people: a conceptual view.

Partha Sarathee Ghosh, a banker at UCBL, presented a paper on corporate social responsibility: contextual considerations.

Later, a number of members of the BEA joined an open question session where they deplored the present state of the country's financial sector, especially the banking sector.

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