Debate on reducing bank interest
Md Joynal Abdin
The Daily Independent on January 24, 2010
During the great depression of 1930s, prominent British economist John Maynard Keynes showed us how to respond to an economic downturn. He guided the governments how to interfere in a free market to make market instruments efficient and result-oriented; how to contribute in private sector development and promoting growth. After a long period of time we are going to forget him and his lessons. As a result, we know, the financial crisis hurt the world economy once again.
There is a misconception that governments have nothing to do in the free market economy. Governments have nothing to do for private sector capacity building and regulating market instrument. It has been proved once gain that without effective government intervention, market loses its efficiency, instruments lose their activity and economic downturn follows.
In Bangladesh, high bank interest rate is decreasing market efficiency and creating an adverse investment climate. Our government is thinking that they have nothing to do in this regard, investors are continuously blaming bankers, and bankers are trying to defending themselves by the name of depositors. The government is playing a role of soundless observer, and as a result investment scenario is going to be tougher continuously. In such a condition, we may learn many things from the great economist Keynes and his lesson. Our government may play a pivotal role to reduce bank interest rate without harming the bankers.
Let’s try to find out the way the government can turn bank interest rate down and save investors without decreasing bankers’ profit margin and saving depositors interest? Think, the government may issue revocable, transferable and cashable bond against profitable ventures like power plant establishment, bridge construction, etc. Then one investor will buy these bonds through IPO and there is an assurance of 12 per cent rate of interest at the end of the year. One investor may cash on it with the face value or sale it in the open share market. Ensuring 12 per cent dividend by investing promising sector is not an impossible practice.The government may promote ICB pension scheme and other instrument with adequate rate of return to collect money from the general depositors.
The government will supply the money to the scheduled commercial banks at the interest rate of two per cent and scheduled banks will be instructed to lend the money to the investors and banks loan at an interest rate of six per cent. Thus bankers can get four per cent margin. Currently they are collecting deposit at nine per cent and lending at thirteen per cent with a profit margin of four per cent. Thus depositors may get their expected rate of return by investing in bond market or ICB pension and other scheme. Bankers may get enough money from the central bank and lending at four per cent profit margin and investor may get industrial loan at a rate of six per cent. This may increase their competitiveness in international market and the country may get an industrial Bangladesh with full employed people.
Lower bank interest rate not only facilitate investment but will help to control rate of inflation, lower fluctuation of essential prices, promote employment.
Let’s think for such an environment, the government declares ceiling of bank interest rate at 6 per cent, than what will happen? Banker will cut savings interest rate at 3-4 per cent, as a result depositors will not deposit money to the banks. But what will be the scenario? What will be the ultimate destination of the money currently deposited in different banks?
With fifty thousand or five lakh taka people never think for large investment. Either they will go for different government saving certificates or invest into share market. So ultimately money will go into the banks. So liquidity crisis would be there. Now question arises how the government will handle such huge liquid money? Interesting thing is: according to a newspaper report the government is under pressure with current increasing trend of government savings papers income and ensuring its interest is a major challenge for the government. In such a condition my proposal may be totally unacceptable to the government. They may think that we are in trouble to handle current savings papers money but how it will be handled when all private deposit goes to the government high rated savings paper or ICB schemes.
I do not think so because it depends upon what the government does with the money. If this money used in non-productive expenditure than it is a challenge but why government is not investing this money in a promising sector. For example we are in trouble due to shortage of power and energy. Why the government is not investing the money to establish a new power plant?
If private companies like Summit Power and other can do profit after investing money collected at 13 per cent interest rate and provide dividend to the shareholders after meeting up all liability, then why the government would have to think for ensuring 12 per cent interest to the savers by investing into power plant? Similar example may be drawn from shipbuilding and other sector as well.
So the government can actively interfere in reducing bank interest rate to 6 per cent without harming the bankers and others. Yes it may create a short-term problem but will open up the door of industrialisation, full employment, and export growth, control inflation and prices of essential commodities.
The government can think about the issue immediately, because currently investment scenario is not good enough. Now we have ever-highest reserve, reducing trade gape but it is not for export increasing but due to import decreasing. Currently import of capital machinery decreased to 19.92 per cent and import of raw materials decreases to 21.85 per cent. It proves that flow of investment hampered.
Huge foreign exchange reserve may not give us any positive result if it does not go for long-term investment. If total money invested into trading purpose then it may give us short-term profit but in long run country have to suffer with huge unemployment, which is major cause of social unrest.