Although the overall weighted average interest rate on lending has dropped to 5 percent in the banking sector, commercial banks are charging their clients higher interest rates — between 30 to 40 percent — for loans through credit cards. Instead of monitoring this issue, Bangladesh Bank has recently doubled the credit card limit and extended the personal loan ceiling.
A source related to the central bank said the loan distributed by credit cards is 100 percent risky. The more such loans are disbursed, the more risk-weighted assets increase in the banking sector. The increase in risk-weighted assets causes the rise of reserved capital against it as well. So, extending loan disbursement limits through credit cards is just another way of amassing more risk-weighted assets. Only affluent businessmen and professionals with Tax Identification Numbers are eligible for credit cards. The banks have issued various types of credit cards in the markets such as Visa, Master Card, Silver Card, Gold Card, etc. Usually, the banks charge up to 3.5 percent service charge for every cash withdrawal using credit cards. It is estimated that clients have to pay BDT30-40 per BDT100 withdrawal through credit cards annually. Taking it up a notch from BDT500,000 earlier, the new credit card limit has been set at BDT1 million, because of the increase in idle money in the banks. Due to an investment stagnation, the banks have plenty of investable funds lying around.
According to bankers, they have to spend an average of BDT5 on every BDT100 worth of deposits. However, loans cannot be disbursed due to a shortage of entrepreneurs. As a result, all the banks are sitting on growing heaps of idle money, which is increasing fund management costs. The banks are investing in alternative sources in order to cut down this cost. Since industrial loans are in a slump, the banks’ focus is on consumer loans now. The fund manager of a second generation bank informed that the lion’s share of the profit his bank made last year came from credit card and consumer loans. He also said that following the drop in deposit interest rates, they had to decrease the interest rate on industrial loans under pressure from Bangladesh Bank and entrepreneurs. In many banks, industrial loans are currently below 10 percent. As a result, they are making profit from credit cards and consumer loans. Since there is no fixed interest rate on loans disbursed through credit card and consumer loans, banks are able to charge high interest rates in these sectors, he added.
Sources at the central bank claim the central bank has ordered commercial banks to decrease the gap between interest rates on loans and deposits, otherwise known as spread, below 5 percent. Yet, most banks currently have 10-10 percent spread, thanks to credit cards. While BDT5 have to be spent on BDT100 worth of deposits, 30 to 40 percent interestis being charged for the same amount of money when it comes to loans disbursed through credit cards. Even at a rate of 30 percent, the spread stands at 25 percent. The higher interest rates and other hidden charges are not only a huge burden on cardholders but also a sign of sheer disregard for Bangladesh Bank rules. To stop this high-interest rate exploitation , the central bank should fix the spread based on the type of product.