Banks' capacity to provide loans at 9 per cent interest has shrunk even before the government-fixed ceiling is implemented as both individuals and corporate institutions are withdrawing deposits to protect themselves from the ongoing economic fallout of the coronavirus pandemic.
The Bangladesh Bank instructed banks on February 24 to set a maximum 9 per cent interest rate on all loan products save for credit cards from April 1.
Although the central bank has already slashed both the policy rate and the cash reserve ratio (CRR), this is not enough to bring down the interest rate for loans.
The banking sector has got an additional fund of Tk 6,400 crore through slashing of the CRR by 25 basis points to 5.75 per cent.
But corporate clients have recently been forced to take out a large amount of money to pay wages and salaries to employees at a time when their production has come to a halt.
Similarly, individuals are cashing out fixed and deposit pension schemes prematurely fearing the impending health and financial risks.
"Banks in Bangladesh will face liquidity pressure like lenders in other countries. How can banks lend smoothly then if they do not have adequate loanable funds?" said Syed Mahbubur Rahman, chairman of the Association of Bankers, Bangladesh.
Lenders have been implementing 6 per cent interest rate on fixed deposit schemes since February as part of their preparation to provide loans at 9 per cent interest from next month.
"But the economy is in meltdown. We will have to give our all-out effort to mobilise deposits when the lockdown is lifted."
Banks will face hurdles in attracting depositors at 6 per cent interest, which will create a stringent situation for implementation of the single-digit lending rate, Rahman added.
The lending rate could be brought down to single-digit if the central bank implements quantitative easing as per its announcement, said Ahsan H Mansur, executive director of the Policy Research Institute.
On March 22, the BB said it would buy Treasury bills and bonds from banks and non-bank financial institutions to tackle the imminent economic slowdown.
Quantitative easing (QE) is a form of unconventional monetary policy in which a central bank purchases longer-term government securities or other types of securities from the open market in order to increase money supply and encourage lending and investment.
The central bank rarely purchases T-bills and bonds from banks.
The BB will have to set a roadmap on the amount of cash it will inject into the money market within a certain period.
Otherwise, the banking sector will not get the confidence to lower the interest rate on lending, Mansur said.
"Lending rate should be brought down in the interest of the private sector, which has been struggling to get their desired funds for long."
Small and medium enterprises will have to be given more support through loans under refinance schemes as they are being hit hard by the ongoing crisis, said Mansur, also a former official of the International Monetary Fund.
Rahman, also the managing director of Mutual Trust Bank, echoed the same as Mansur.
He feared that defaulted loans would go up further after June when the central bank's moratorium period for borrowers ends.
Inflation will not be fuelled if the central bank injects money into the market, said Arif Khan, managing director of IDLC Finance.
Both global and local demand have dried up and the declining petroleum price is a harbinger of the trend, he said.
"Borrowers are now unable to repay loans, adding an extra pressure on lenders. We are not permitted to violate the central bank's instruction to give out loans at single-digit."
Against the backdrop, many lenders may adopt a go-slow policy on loan disbursement, putting an adverse impact on the private sector, Khan said.
"Banks' profitability will see a sharp decline if they give out loans at single digit without managing deposits at 6 per cent," said Emranul Huq, managing director of Dhaka Bank.
The loan-deposit ratio should be relaxed along with quantitative easing measure in order to widen banks' capacity to disburse loans, he added.
The BB has yet to backtrack from its stance, said its spokesperson Md Serajul Islam.
"We are closely monitoring both global and domestic financial state of affairs. And the central bank will take decisions when the lockdown is lifted."