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Bank & Finance - January 31, 2023

Hungry banks depriving from customers’ deposit

Zarif Mahmud: Most of the banks of country are not getting deposits from the customers even after offering high interest rates. Again, the inter-bank money market (Call money) is not providing money as per the demand. The repo interest rate, the main means of borrowing cash from the central bank, has also been increased. In this, the cost of funds of the banks is increasing.
Although the bank’s source of income or loan interest rate is fixed at a maximum of 9 percent. In this situation, Bangladesh Bank’s refinancing funds have now become the lifeline or survival of the country’s banking sector.
Central bank funds
The central bank is increasing the amount and size of the refinancing fund to increase liquidity in the money market. Only in the last six months, a special fund of Tk 62 thousand crore has been formed.
These include a Tk 25,000 crore refinancing fund for Cottage, Micro, Small and Medium Enterprises (CMSMEs), a Tk 10,000 crore Export Facilitation Pre-Finance Fund (EFPF), a Tk 5,000 crore fund for pre-shipment of export-oriented industries, exports and a Green Transformation Fund (GTF) of Tk 5,000 crore to sustain the productive industrial sector and a fund of Tk 5,000 crore for the agriculture sector.
These funds have been formed from the central bank’s own sources. Bangladesh Bank is advancing the process of forming more new funds.
Commercial banks can borrow money from the formed fund at a maximum interest rate of 5% to 2.5%. Banks are getting a maximum spread of up to 5 percent in some funds even after reaching the loan to the customers at the interest rate set by the central bank. Apart from the new funds, banks are also able to borrow money at low interest from the stimulus fund created during the financial crisis caused by Covid-19.
Banks in danger
Bank executives say, banks now have to pay more than 9 percent interest to collect term deposits from customers. Funding charges of 1 to 3 percent are added to the collected deposits. All in all, the bank’s cost of funds stands more than 10 percent. Although the banks have to give loans at a maximum of 12 percent interest.
Rather than making a profit, such investments are risking capital loss. In this situation, the refinancing funds of the central bank are more profitable. Some special funds offer spreads of up to 5 percent. If the investment is right, the profit of the bank will also increase.
Bangladesh Bank also wants banks to borrow more money from the refinancing fund. The central bank believes that this will ensure the expansion of manufacturing industries, employment creation and increase in production in the agricultural sector as well as proper utilization of loans.
Expert opinion
Governor Abdur Rauf Talukder himself expressed such a sentiment while announcing the monetary policy for the second half of the current fiscal year. He said, ‘We are discouraging banks from borrowing through repo. For this reason, the repo interest rate has been increased to 6 percent. The central bank has set up a refinancing fund of Tk 50,000 crore. The interest rates of these funds are very low. We want the banks to take money from the special funds and distribute loans.
Syed Mahbubur Rahman, Managing Director of Mutual Trust Bank (MTB) thinks that refinancing funds are a blessing for the banking sector at this time of liquidity crisis. The former chairman of Bank Executives’ Association of Bankers Bangladesh (ABB) told, “Refinancing funds are very good for providing liquidity and profitability to banks.
If the money from the refinancing fund is utilized properly, the economy of the country will benefit as well as the bank. Due to liquidity crunch now the interest rate on deposits has gone up to 10 percent. It is not possible to collect deposits at such high interest rates and disburse loans at 9 percent interest. Refinancing funds have very low interest rates. Some funds have a spread of up to 5 percent. These funds are profitable from all sides.
Dependent on Bangladesh Bank
On July 19 last year, a notification was issued by Bangladesh Bank to form a Tk 25 thousand crore refinancing fund for CMSMEs of the country. Banks can take money from this special fund at 2 percent interest per annum. The maximum interest rate of this loan at customer level has been fixed at 7 percent. In this fund formed for the CMSME sector, banks are getting a spread of 5 percent.
Bangladesh Bank has recently set up a special scheme in local currency to reduce the pressure on the Export Development Fund (EDF), which is made up of the country’s foreign exchange reserves. This special fund of Tk 10,000 crore formed on January 1 this year has been named EFPF.
Commercial banks can borrow money from this fund at one and a half percent interest. Banks will be able to give loans to the exporters at a maximum interest rate of 4 percent. An exporter can take loan facility from this fund from a minimum of Tk 5 crore to a maximum of Tk 200 crore. The loan from this fund will be used for importing or local procurement of raw materials for production.
Bangladesh Bank has also set up a Tk 5,000 crore refinancing fund for the pre-shipment sector of export-oriented industries. The special fund is named ‘Pre-Shipment Credit Refinancing Scheme’. Banks are being given money from this fund at 10.5 percent interest.
And at the customer level, the loan interest rate of this fund has been fixed at a maximum of 3.5 percent. The central bank has formed a fund called GTF of Tk 5000 crore to sustain the export and manufacturing oriented industrial sector.
The central bank has formed a fund called GTF of Tk 5000 crore to sustain the export and manufacturing oriented industrial sector. The interest rate of this fund for banks has been fixed at 1 percent.
And the customer is getting a loan from this special fund of green economy at a maximum interest rate of 5 percent. Again, a refinancing fund of Tk 2 thousand crore has been formed for the development, operation and growth of the shipbuilding industry.
To ensure food security of the country, a refinancing fund of Tk 5000 crore has been formed for the agriculture sector. Banks can borrow from this fund formed on November 17 at only 10.50 percent interest. The maximum interest rate for this loan at the customer level has been set at 4 percent.
The central bank has ordered the distribution of these loans among the farmers in the bank’s own network. In addition to rice, fish, vegetables, fruit and flower cultivation, the loan of this special fund will be used in the poultry and dairy production sectors. The central bank has also set up a fund called ‘Bangladesh Bank Agricultural Development Common Fund (BBADCF)’ for the agricultural sector.
Banks that fail to achieve the target of agricultural and rural credit disbursement will deposit the amount equal to their unachieved share in this special fund. The central bank has made provisions to provide money from this fund to other banks at the rate of 2 percent.
An incentive package worth around Tk 1 lakh crore was announced to protect businesses from the impact of Covid-19.
Among these packages, the third phase of the incentive package of Tk 33,000 crore for the large industry and service sector and Tk 20,000 crore for the SME sector is still under implementation.
Again, to protect the export sector, the size of EDF was increased from Tk 350 crore to Tk 700 crore. Bangladesh Bank officials said that some other incentive packages announced during Covid are still ongoing.

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