Low demand for money lowers interest rates

Posted by BankInfo on Fri, Aug 14 2015 01:38 pm

Intense competition among the 87 lenders to grab clients is putting pressure on the interest rates, but demand for money is not rising, said industry insiders.

Of the lenders, 56 are banks and 31 are non-bank financial institutions. The nine new banks and NBFIs are facing further challenges, as the cost of their funds is relatively higher than their peers.

“The market is very dull. Moreover, competition to bag clients is intensifying by the day,” said Asad Khan, managing director of Prime Finance.

Some of their good clients have paid off their loans with the NBFIs with the money borrowed from the banks, said Khan. Many NBFIs have faced a similar situation this year.

The poor demand for money has also discouraged banks from taking deposits from customers. Banks now offer less than 7 percent for a three-month fixed deposit, down from around 10 percent a year ago.

Bankers said they are giving corporate loans at an interest rate of 10.5 to 11 percent, down from 13 to 14 percent a year ago. Small loans now cost 14 percent, dropping from 16 percent in the previous year.

The banking industry's average loan-deposit ratio (LDR) now stands at around 70 percent, against the central bank's set ceiling at 85 percent and 90 percent for conventional and Islamic banks. So, a conventional bank cannot use 15 percent of its deposits due to poor demand for money.

or example, Pubali Bank has Tk 21,000 crore in deposits and its LDR stands at 73 percent. The bank fails to utilise or invest Tk 12 for every Tk 100 in deposits. As a result, Pubali's idle money stands at over Tk 2,500 crore.

The LDR is almost the same for all private banks, but the nine government banks are feeling the pinch of poor business as their LDR has gone down to below 60 percent.

“We want to bring down our corporate lending rate to 10.5 percent from 11 percent, to encourage businesses to get loans,” said Ahmed Kamal Khan Chowdhury, managing director of Prime Bank.

There is a demand for loans, but it is nothing compared to the funds available with the banks, he added.

Muklesur Rahman, managing director of NRB Bank, said clients are there, but good clients are limited. “Price competition among the banks is being intensified to attain good borrowers.”

Some lenders are exploring new windows of funding for their survival.

Pubali Bank is trying to give small loans in the wake of sluggish demand for money by large corporate players. “Corporate loans are declining in our portfolio, but small and medium loans are increasing, thanks to our large network of 435 branches,” said Abdul Halim Chowdhury, the bank's managing director.

IDLC Finance, a leading NBFI, focuses on retail and SME loans to avoid intense competition for corporate clients.

“Everybody, be it a bank or NBFI, runs after corporate clients. It is difficult to make business from there,” said Selim RF Hussain, managing director of IDLC.

IDLC's retail loans, particularly home and auto loans, have been witnessing phenomenal growth in the last two years. Home loans grew by 35 percent to Tk 460 crore in 2014 from the previous year. The lender has set a target to lend Tk 700 crore in home loans this year.

However, the lenders that cannot make good business are not without hope. The central bank has just announced a new monetary policy and the government has taken a number of big infrastructure projects, said industry insiders.

“I think the situation will improve in the next two to three months,” said the Prime Bank CEO.

News:The Daily Star/14-Aug-2015
Posted in Banking, News