As lending rates by the Bangladesh Association of Banks (BAB) was brought down to single digits last year, many expected the commercial banks in the markets to adhere to it. However, as the ongoing liquidity crisis continues to plague the banking industry, it can be seen that most of the private commercial banks are currently lending to small and large scale industries at rates between 11.5 percent to 15.5 percent.

On the other hand of the spectrum, the private banks are seen to be desperate for deposits in the market, with many increasing the interest rates on term deposits, in order to attract more funds into their coffers. Some private commercial banks can be seen to offer more a maximum interest rate on deposits at 11.5 percent, which is now higher than the interest rates offered by national savings tools. In addition, the increased 5 percent tax on national savings tools shall further attract savers to deposit in commercial banks.

However, this increase in deposit interest rates are inevitably making its way to increased commercial lending rates in the market and has made it even tougher for small to medium industries to borrow in the market and to fund prospective economic activity. The ongoing liquidity crisis seems to also have made its way to the stock market, with the stock market really struggling of late, especially last week.

Experts in the banking sector do not believe that having a single digit interest rate on lending feasible at the moment, with the liquidity crisis in the market as well as the increased deposit rates being offered in order to counter the liquidity crisis. In addition to this, the liquidity crisis is expected to get worse from September, as the banks in the market shall have to adhere to the new policy issued by the central bank in February, 2019. The central bank issued a circular in February, mentioning that from the 1st of September, 2019, all banks shall have to keep 5.5 percent cash reserve requirement and also 13 percent of their total liabilities as statutory liquidity ratio.

This policy shall surely further increase interest rates on lending in the market and place further pressure on the banking sector. Bangladesh bank has already advised 47 scheduled banks in the market to bring their interest rate on lending down to 9 percent, in accordance with the advise of BAB. However, according to the central banks own latest monitoring report, banks are lending funds to small industries at interest rates between 9.0 per cent and 20 per cent, and medium and large industries at rates between 6.0 per cent to 17 per cent, which is still above the proposed rates.

A Bangladesh Bank official mentioned that they shall continue to monitor the lending rate offered by the private commercial banks in the market and also investigate the higher rates.

The central bank shall unveil its own Monetary policy statement (MPS) for the first half of the fiscal year 2019-2020 on Wednesday, the 31st of July, 2019. It is widely expected that there shall not be any wholesale changes in its monetary policy.

Another cause for the lack of liquidity in the market is down to the incredibly high rate of Non-performing Loans (NPL) in the market. The volume of NPLs climbed by more than 18 per cent in the first quarter (Q1) of the year compared to the previous years first quarter according to BB data. The central bank had previously instructed the banks to improve their recovery drives for the loans, but this has been an ongoing issue in the whole Banking sector, with no sign of recovery.