Business Environment · Government Policy · Industrial Development · Industrialization

Bank interest rate should be reduced

Bank interest rate should be reduced

Md. Joynal Abdin

The Financial Express on January 19, 2010

DURING the great depression of the 1930s prominent British economist John Maynard Keynes showed how to respond to an economic downturn. He gave the authorities the methods to intervene in a free market and make market instruments efficient and result-oriented. The economic crisis the world is facing now would not have happened had Keynes’ methods been applied.

There is a misconception that the government has nothing to do in a free market economy. It has no role in building private sector capacity and regulating market instruments. It has been proved once again that without effective government intervention the market loses its efficiency, and instruments fail to function, leading to an economic downturn.

In Bangladesh, a high bank interest rate is affecting market efficiency and creating an adverse investment climate. The government apparently thinks that it has nothing to do in this regard, while investors are persistently blaming bankers and the bankers are trying to defend themselves in the name of the depositors. The government is playing the role of a silent observer and as a result, the investment scenario is taking a depressed trend. Under such a condition we may follow the lesson taught by Keynes. The government may play a pivotal role in harmonising bank interest rate.

Let us try to find how the government can bring bank interest rate down and encourage investors without hampering banks’ profit margin and depositors’ interest. For example, the government may issue revocable, transferable and cashable bonds against profitable ventures like power plants, bridge construction etc. An investor may buy these bonds through IPO with an assurance of 12 per cent rate of interest at the end of the year. He may cash it at the face value or sell it in the share market. Ensuring 12 per cent dividend by investing in a promising sector is not an impossible task. The government may promote ICB pension scheme and other instruments at a higher rate of return to collect money from the general depositors. The government will provide the fund to the commercial banks at an interest rate of two per cent and the banks will in turn lend the money to the investors at an interest rate of six per cent. Thus bankers can get four per cent margin as they are doing now. They are currently collecting deposit at nine per cent and lending at thirteen per cent, with a profit margin of four percent. Thus, depositors may get their expected rate of return by investing in the bond market or ICB pension and other schemes; bankers may get enough money from the central bank and lend at four per cent profit margin and investors may get industrial loan at a rate of six per cent. This may increase their competitiveness in the international market and Bangladesh may turn into a developed industrialised nation.

Low bank interest rate will not only facilitate investment but will also help control inflation, stabilise prices of essential commodities and promote employment.

Let us think of such an environment where the government sets a ceiling of bank interest rate at 6 per cent. Then what happens? Bankers will cut savings interest rate at 3-4 per cent and drive away the depositors. What will be the ultimate destination of the money currently deposited in different banks?

With Tk 50,000 or more in hand the people will never think for large investment. They will probably go for investment in different government saving certificates or in the share market. So, ultimately money will go back into the banks. So, liquidity crisis will not be there. Now, the question arises as to how the government will handle such a huge amount of liquid money? The government, as reported in newspapers, is under pressure to pay interest against the savings tools it has sold to the people.

The government should also think how it will handle the larger flow of money to its high-yielding savings papers or ICB schemes.

 

This should not pose any problem. It will depend on what the government will do with the money. If this money is spent on non-productive purposes, then some problem may arise but there should be no problem if the investment is made in a promising sector. For example, there is a power crisis now. Why does the government not invest money to establish a new power plant?

If private companies like Summit Power and others can make profit after taking bank loan at 13 per cent interest and provide dividend to the shareholders after meeting all the liabilities then why should not the government ensure 12 per cent interest to the savers by investing into a power plant? Similar examples may be drawn from ship-building and other sectors as well.

So, it is possible for the government to intervene and reduce bank interest rate without harming bankers and depositors. This may, however, create a short-term problem but will open up the door for industrialisation, higher employment and export growth.

The government can think about the issue against the backdrop of poor investment when the country has the highest-ever foreign exchange reserve and trade deficit is narrowing.

If the huge foreign exchange reserve is spent on trading purposes this may bring some short-term profit. But the long-term interest of the country will be served if the money is used for long-term investment. 

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