The Wild Ride Ahead

I posted the last article on January 1st, 2020. “Hope 2020 will not let me down” was the last line of the article. Now 8 months in, my initial prediction seems widely off the mark. I can still find some positives despite the struggles.

I joined The City Bank Limited, one of the largest and oldest bank in Bangladesh. Currently going through the rotation period where I am being taught different business divisions of the bank. So far, I have visited Retail division, SME division, Cards Division and currently attached to operations divisions. There are six more divisions to go. So far, I am really enjoying it. Though Covid has cut the duration of the attachments, the attachments are more compact and very enjoyable. There are so many things to learn.

Recently, one thing that has been plaguing banking industry is that central bank has fixed the lending interest rate of the banking sector. Fixed would be a politically incorrect word as central bank has only fixed the upper range of the interest rate. It violates the free market economy but central bank is right this time. Interest rate was too much already. Central bank says lending should not have interest rate of more than 9%.

On paper 9% seems fine and some people would even comment that it is still too high. Central banks wants to stimulate private credit growth rate which has hit historical low in 2020. So, the intention is legit.Then again, this is not the whole story. Let’s dig deeper, I’ll limit it by 2 paragraphs to avoid unnecessary rants.

Bangladesh has a inflation rate hovering around 5.5%. If banks lend at 9% rate, they would offer depositors a rate of not more than 6%. So, if you save, you are actually gaining nothing. Stock market is broken and banks are offering depositors nothing. Why would I save the money in Banks?

I have kept the worst offender for the last. Here’s the thing, government saving certificates can be bought by individuals and is relatively risk-free (Better term would be least risky). Take a wild guess what could be the interest rate.

The interest rate on deposit is over 10%.

Who would deposit money in the bank in their right mind? Where would banks find money to lend at 9%? How would bank survive?

Policy-wise, it’s not a good news for banks. As someone who has joined a bank, I am having a hard time realizing the consequences. A wild ride ahead, no doubt.