BB sets to announce ‘SMART’ lending rate for July

Industry Desk: After three years of maintaining a fixed interest rate cap on lending, Bangladesh Bank is set to unveil a reference lending rate, as per the new monetary policy announced last month for the next six months to rein in the skyrocketing inflation.
The monthly reference lending rate, termed SMART, will be determined on the basis of the six-month moving average rate of treasury bills, with a margin of up to 3 percent for banks and 5 percent for non-banking financial institutions.
Yesterday, the flexible lending rate cap with a market-driven reference lending rate for all bank loans will be announced for July to enhance competitiveness in the banking sector.
Under the new system, Bangladesh Bank will adjust the interest rates on loans to banks, called the ‘policy rate’.
Policy rate affects the interest rates banks charge their customers for borrowing money.
The central bank will set a maximum and minimum limit for policy rates which will be used as reference rates for the lending rate in the market.
HOW IS THE SMART RATE TO BE CALCULATED
On Jun 19, Bangladesh Bank set 7.13 percent as the SMART rate for June by calculating the average treasury bills from December 2022 to May 2023.
As per the policy, the lending rate for banks will rise to 10.13 percent (as a maximum margin of 3 percent can be applied on top of the SMART rate) with the addition of a 1 percent supervision fee, meaning the rate will be 11.13 percent.
This rate can be applied to personal, car, and consumer loans.
The lending rate for agricultural and rural loans will increase to 9.13 percent from the existing 8 percent for farm loans and 9 percent for other rural loans.
THE EFFECTS OF THE NEW POLICY
As per the new monetary policy, the SMART rate cannot be changed within six months of its application, which means that even if the interest rate increases, the bank cannot raise it for existing customers. Similarly, the customer’s rate will not decrease if the interest rate decreases.
In early loan repayment, personal loans, car purchase loans under Cottage, Micro, Small, and Medium Enterprises, or CMSME, and consumer loans will be subject to a proportionate supervision fee of 1 percent.
If a borrower wants to repay the loan before its maturity, the bank can charge a supervision fee of 0.50 percent on loan.
Although bankers and analysts have welcomed the move in general, some believe that the banks may initially face some push backs from borrowers as their charges are set to go high.
“The whole banking sector is up for a challenge to understand the implications of adjusting the lending rate,” said Syed Mahbubur Rahman, managing director of Mutual Trust Bank Ltd.
From Sunday on, the central bank will reveal its net foreign reserve situation in line with the International Monetary Fund, or IMF manual.
As per the manual known as BPM6, which is based on the balance of payments and the International Investment Position Manual, the Bangladesh Bank will have to exclude foreign currency loans to local banks, known as the Export Development Fund, or EDF, deposits with state-owned local banks, deposits with the International Development Board Group, fixed-income securities below investment grade, a credit extended to Sri Lanka and other foreign currency assets in non-convertible currencies.
The IMF says the central bank must also exclude the reserve-related liabilities to estimate the net reserve.
However, Bangladesh Bank said it would only report the net foreign reserve situation to the IMF and the data would not be made public.