Flash Report /
Bangladesh

Bangladesh – Rate cap delayed; but all loans targeted, not just industrial

    IDLC Securities
    2 January 2020
    Published byIDLC Securities

    Bangladesh's Finance Minister revealed that the government wants to implement the proposed rate cap for all loans (except credit cards). We think it is very difficult to implement a 9% lending rate cap for the SME sector. Implementation has been delayed by three months to 1 April 2020.

    A brief history of the rate cap

    June 2018: The interest rate cap (9% lending rate and 6% deposit rate) concept was initiated back in June 2018. Afterwards, as per the demands of Association of Bankers, the government provided several incentives to implement it. The incentives were a corporate tax cut, CRR cut, provision relaxation for some sectors and modification in government deposit rules to allow private banks to receive government deposit. Despite all the incentives, single-digit interest rate initiatives failed due to higher fund flows to National Savings Certificates. 

    1 December 2019: One month ago, the discussion to implement a lending rate cap of 9% resumed. But it was limited to only industrial loans effective from 1 January 2020. A seven-member committee was formed to come up with ways to lower the interest rate. 

    30 December 2019: In a recent meeting with the chairmen and managing directors of all the private banks, the Finance Minister revealed that the government wants to implement the rate cap for all loans (except credit cards) instead of only industrial loans. However, the implementation has been delayed by three months to 1 April 2020 as per the request of bankers. Simultaneously, they agreed some changes: 1) a max 6% deposit rate for private banks; 2) a max 5.5% deposit rate for state-owned banks, 50bps lower than for private banks; 3) a 100bps increase in the loan-deposit ratio; and 4) government deposits to be equally distributed between the state-owned banks and private banks on the basis of paid-up capital. A circular is yet to be issued (see link).

    Analyst opinion  

    The initial plan was to implement a 9% interest rate cap only for industrial loans. But subsequently, all loans (except credit cards) have been included in the discussion. We think it is difficult to implement this for all loans as the inherent risks vary substantially from one type of loan to another. This loan cap is less likely especially for the SME loan segment due to its business nature. SME loan maintenance is costly in terms of both operation and cost of risk. 

    Another factor is that corporate loan takers have a strong lobby with the government so they can push for single-digit rates, whereas SME loan takers are small individuals with no lobbying power. Hence, even if the loan cap is implemented, this is less likely to be applicable for the SME sector. Since there is a 3-month time lag, there is scope for more discussion before it is implemented. 

    If the interest rate cap is implemented without any modification, then we may see: 

    1. Slowdown in private sector credit growth as bankers will lend only to top-notch borrowers
    2. Downward shift in profitability of banking sector
    3. Higher investment in Treasury Securities since T-bonds offer 8.5- 9.5%
    Table 1: Coverage average lending yield 
    Banks

    Lending Yield

    BRACBANK

    11.2%

    CITYBANK

    9.9%

    DUTCHBANGL

    9.8%

    EBL

    9.8%

    UCB

    9.4%

    PRIMEBANK

    9.2%

    ISLAMIBANK

    8.0%

    * As of Sep 2019

    Source: Quarterly Company Report


    Impact for BRAC

    The weighted average lending yield of BRAC Bank is 11.2% because of its higher concentration in high-yield SME loans. The lending rates for most of the SME loans are in the 13-15% range. As discussed earlier, it is very difficult to implement a 9% lending rate cap for the SME sector. Therefore, we await the official circular before making any change to our BRAC model. We maintain our Buy rating with an unchanged price target of BDT82.6.