Dhaka (The Daily Star/ANN) - Manufacturers in Bangladesh have warned that rising bank interest rates are going to hit their business growth at a time when the global and domestic economy is on a slow growth path.
After the withdrawal of cap on lending rates by the central bank on January 4, commercial banks have started hiking interest rates for both new and existing customers at their will.
Now banks charge as low as 15.5 per cent interest for term loans and the rate goes up to 20 per cent depending on customers.
"A sudden rise in interest rates has become a burden on us. It'll dampen demand and production," said Nasir Uddin Biswas, chairman and managing director of Nasir Group, an industrial conglomerate with an annual turnover of 30 billion taka (US$368.6 million).
Although Biswas has a good reputation for his excellent loan repayment records, he also has to pay more for higher bank interest rates.
"I have to pay 15.5 per cent interest for a loan of 800 million taka from a foreign bank instead of previously agreed 12.5 per cent," said Biswas.
He has to pay an additional 24 million taka annually as interest only due to a rise in interest rate by 3 percentage points.
"If one combines high energy, labour and transport costs with high interest rates, entrepreneurs can't make returns on their investment," Biswas said.
High interest rates affect businesspeople, including manufacturers and exporters who have set up their industries with bank loans. They heavily depend on funds from banks instead of the capital market to run and expand their business.
So, a rise in interest rates pushes up their costs of doing business.
As a cushion for the businesses, the Bangladesh Bank had imposed a cap on lending rates for exports, imports of essential commodities, term loans and working capital for industries during the global financial crisis in 2007-2008.
On January 4, the BB lifted the interest rate limit, including 13 per cent for term loans, which prompted the banks to increase their lending rates now hovering between 16 per cent and 20 per cent.
Iftakher Uddin Farhad, chairman and managing director of export-oriented Farr Ceramics, is concerned about a surge in bank interest rates.
"Interest rates at 19-20 per cent are not at all practical. Moreover, the global and domestic economic situation is not favourable for us," said Farhad.
He borrowed from a local private bank at 16 per cent in 2011 to expand his factories, but a few months back the rate has been raised to 19.5 per cent.
"This higher cost for bank loans is affecting our competitiveness. We've to compete with China in global export markets," said Farhad.
Ceramics export is already on the wane as the country witnessed less than 10 per cent growth in fiscal 2011-12 from average 15 per cent in the past five years.
"We cannot survive with this high borrowing cost after importing raw materials from China, a major competitor of us," said Farhad.
Readymade garments, which earned 80 per cent of the country's total exports worth more than $24 billion in fiscal 2011-12, are suffering the most.
"Every factory with a bank loan is suffering as this higher borrowing cost was beyond an entrepreneur's calculation," said Anwar-ul Alam Chowdhury, former president of Bangladesh Garment Manufacturers and Exporters Association (BGMEA).
He said all the banks have increased their lending rates by 2-3 percentage points after the withdrawal of the cap by the central bank.
To cope with the situation, some businesses have changed their strategies and opted for funds from abroad.
Dulal Brothers Limited, known as DBL, is such a business house.
"We're in a better position when many garment owners are struggling to survive," said M.A. Jabbar, managing director of DBL.
He said DBL borrowed $15 million from foreign sources at 6.25 per cent interest rate and paid off the high-cost term loans of different banks in Bangladesh.
"This (foreign loan) has helped us a lot, otherwise we would have to struggle like others," said Jabbar.
Bankers are also in dilemma due to a sharp rise in cost of funds and a hike in lending rates that may cause for an increase in default loans.
Helal Ahmed Chowdhury, managing director of Pubali Bank, blamed higher deposit cost for a surge in lending rates.
Association of Bankers Bangladesh, a forum of banks' chief executive officers, had agreed in principle that no bank would offer more than 12.5 per cent for deposits and 15 per cent for term loans. But this is not followed by all banks, he said.
"May be, some banks are taking deposits at higher rates up to 14 percent, so their lending costs go up," said Chowdhury.
(US$1 = 81.39 taka)