Assignment on Review of Article

Course Name: Contemporary Issues in Corporate Banking

Course Code: FIN 5104

Submitted To
Dr. Jannatul Ferdaous
Associate Professor & Chairman
Department of Business Administration in Finance and Banking
Faculty of Business Studies (FBS)
Bangladesh University of Professionals

Submitted by
ULFAT MURSHED TAMANNA
ID: 2022331022
MBA in Finance & Banking
Bangladesh University of Professionals

Date of Submission
12 August, 2020
 Single Digit Interest Rate: Bangladesh Perspective

In this study it intends to identify the banks and sectors that are respectively implementing and
getting the advantages of single digit interest rates. This study also examined the factors affecting
lending and deposit rates in banks. The study recognizes a large group of factors that have
significant impacts on lending rates. Then based on these key factors, it has made an attempt to
get an estimate of a probable range of lending rate to see if it is at all feasible for banks in
Bangladesh to work suitably by charging a single digit interest rate on their loans and advances.
Besides some surveys have done from which it has been seen there are some progressing activities
by banks so that the cost of fund could be reduced and the desired decrease in lending rate can be
accomplished.

For conducting this study yearly data has been collected from secondary sources such as World
Development Indicators (WDI) of World Bank, Bangladesh Economic Review of Ministry of
Finance, Bangladesh. Data has been collected for the period from 1994 to 2016. They used
econometric technique like simple linear regression model to estimate the relationship investment
and interest rate. As primary data information were collected from 56 scheduled banks operating
in the country through a structured questionnaire to know about bank's sector wise loan
disbursement and its recovery, outstanding amount of loan, gross NPL rate and interest rates

At first, the study shows the interaction between Investment and Lending Rate. This study finds a
negative relation between real private investment growth and lending rates during 1995-2016 in
Bangladesh economy. It shows that real lending rate adversely influences both real gross
investment and private investment significantly. On the other hand, exchange rate depreciation
influences investment positively. Then the study shows the credit disbursement in 2016 and 2017
respectively. The highest credit disbursement was in the industrial sector. The second largest
amount of credit disbursement went to the trade & commerce sector followed by the SME
financing in both two years. This outcome is conceivable as the contribution of industrial and
manufacturing goods in exports earning is surging in these years. Moreover, Bangladesh economy
is encountering fast monetary development where industry's share on GDP is also in rising trend.

The study also finds similar trend of recovery and outstanding amount of loan in line with the
credit disbursement in 2016 and 2017. It has been seen that most of the loans and advances
especially in consumers' credit, construction, transportation and exchange including green & SME
funds are facing way higher than 9 percent rate while weighted average deposit rate is well under
6 percent. They argued that the surpluses produced from the depositors due to lower deposit rates
are predominantly shared among banks and borrowers in the form of either higher spread or lower
lending rates. The average lending rate in the banking industry was 9.54% in 2017 and was 10.25%
in 2016. The study reveals that the highest average lending rate was in consumer financing in all
the sectors driven by credit card uses. Private commercial and islami banks were fundamentally
charged the higher lending rate as compared to that of state owned, specialized and foreign banks.
Banks' group-wise study shows that possible lending rates for SCBs, PCBs and FBs as an
individual group would be 9.7% 11.0% and 7.4%respectively against their actual weighted average
rates of 7.1% 10.3% and 9.1% respectively. These estimates indicate that the FBs are charging
marginally higher rate in spite of their capacity of making credits at much lower rate while the
NCBs, beyond their capacity, are offering loans at well under 9 percent rate.The study also shows
that the average gross NPL rate was 11.54% and 11.41% in 2016 and 2017 respectively in the
banking industry of Bangladesh The rate was higher in trade & commerce sector. Though the
major share of credit was disbursed by the private commercial banks and islami banks but their
NPL rate was lower as compared to the other categories of banks.

As per the declaration, all banks should maintain the interest rate spread around 3 percent with 9
percent lending and 6 percent deposit rate. But except the state owned commercial banks, other
private commercial and foreign banks failed to maintain declared 3 percent spread mainly due to
high lending rate. The study discovers that most of the banks operating in the country consider the
cost of fund, demand and supply of loanable fund, regulatory compliance, operating expense,
resource-liabilities condition, credit risk, monetary policy stance of BB, money market situation,
NPL position etc. while setting interest rate on loans and deposit. Moreover, advance to deposit
ratio, yield on government securities, spread, etc. are significant elements influencing the deposit
rates. Around 55 % banks consider cost of fund and peer banks' interest rates when they determine
their interest rate on loan and advances. Based on these key factors, an attempt has been taken get
an estimate of a probable range of lending rate to check whether it is at all possible for banks in
Bangladesh to work suitably charging a single digit interest rate on their loans and advances. The
estimated outcomes show a range for loans varies from 6.2% to 13.0% that means a bank with low
cost of fund, low operating cost, low capital charge and low risk factors could set a lending at as
low as 6.2% while a bank with high cost of fund, high operating cost, high capital charge and high
risk factors would not be able to set its lending less than 13%.

In order to reducing current lending rate, banks are taking number of policies like decreasing the
cost of fund, decreasing classified loan, ensuring quality in asset portfolio and quality in credit
growth, enhancing institutional efficiency, reducing the dependency on interest income, reduction
of lending rate in priority sector, availing BB refinance scheme.

In this paper, it is observed that private commercial and islami banks are the major part in terms
of credit disbursement in financial markets of Bangladesh and their lending rate is higher as
compared to other types of banks operating in the economy. So to cut down the lending rate in
single digit substantially, proper policy measures are needed to decrease the tendency of setting
lending rate at twofold digit by those banks. Some policy initiatives may be considered by the
banks to reduce the lending interest rate can be: Establishing good governance in the banking
sector to reduce financial scams and malpractices in the banking industry; Steps to guarantee a
solid liquidity condition maintaining required flow of loanable funds; Encouraging banks to lend
more to the productive areas to contribution to the economy’s income generating activities and to
diminish default risks; Finally, strides to guarantee appropriate guiding and monitoring by central
bank and by commercial banks themselves are required to handle the factors that make difficult to
reduce lending rates.
 The Role of Capital and Liquidity in Bank Lending: Are Banks Safer?

This paper looks at two key parts of the ever-expanding complexity of the Basel III standards: the
relationship among capital and liquidity requirements and banks’ loan growth, and the effects of
loan growth on bank stability. Using data of more than 2,054 commercial banks from 117
countries, this paper examine the nexus among regulatory requirements, lending, and stability. It
finds that there are positive effects of capital requirements and short-term liquidity buffers on the
growth of lending. Despite the tightening Basel III regulation, lending has expanded in the
presence of higher capital requirements and liquidity coverage ratios. The findings of this paper
suggest that the intensity of the relationship between bank capital and liquidity and loan growth is
affected by creditor rights protection and bank activity regulation.

For the study bank-level information has been taken from ORBIS Bank Focus. Different types of
variables are used like country-level data on bank market characteristics, creditor rights, and
macroeconomic variables from the World Bank Global Financial Development database, World
Bank Development Indicators, and the Institute’s Governance Group. Other variables like
measuring restrictions on non-traditional banking activities come from the World Bank’s surveys
on Bank Regulation and Supervision. The final sample consists of an unbalanced panel dataset
from up to 2,054 banks and a maximum of 12,538 bank-year observations in 117 countries during
the 2000–2016 period. The analysis considers that capital and liquidity requirements may affect
loan growth and stability simultaneously and that changes in granted loans may be an indirect
channel leading to changes in bank stability. This analysis requires a procedure in two phases in
order to control for endogeneity about loan growth and stability and their possible simultaneous
dependence on both regulatory features. This paper combine a two stage least squares (2SLS)
procedure with panel data estimators. The study also used the Z-Score (ZSCORE) to proxy for the
level of bank stability. Bank stability and loan growth variable has been traditionally used as an
inverse measure of bank risk. They also used the TIER1 capital ratio as the variable that
approximates the Basel III capital requirements. The study also includes a set of both bank- and
country-level control variables to take into consideration cross-bank and cross country
heterogeneity over time, which might affect the dependent variables.

By applying a 2SLS technique, this paper provides evidence on a positive connection between the
expanded degree of loan growth and bank Z-score that is predictable with the higher growth of
loans –promoted by higher capital and liquidity standards– expanding bank stability at the same
time. In addition, the analysis provides evidence on the presence of a potential substitute effect
between capital requirements and creditor rights protection and regulation on bank activities. This
study supports the idea that a holistic approach to analyze the interaction among capital and
liquidity and bank lending is required. The 2SLS analysis is sound with the need to adopt an
integrated and unitary framework to explain and assess the strategic interaction at bank-level. The
evidence contributes to the debate on whether the more rigid Basel III conditions have a positive
effect on loan growth. Especially important finding is that capital and liquidity affect bank stability
differently concerning the degree of creditor rights protection, bank diversification strategies, and
bank participation in the ownership structure of non-financial firms.
Results from first-stage estimates confirm the positive effect of both TIER1 and LCR on the
growth of bank loans. According to their previous results, they do not find any statistically
significant effect of the NSFR variable on loans growth. The individual coefficients for TIER1 and
LCR are negatively and significantly associated with the ZSCORE variable .The individual effect
of the NSFR variable indicates that higher amount of stable funding in the bank balance sheet
positively affects stability through channels different from lending supply. Regarding the control
variables, SIZE is positively associated with the ZSCORE, which suggests that larger banks are
safer than smaller ones as they are more able to diversify and manage risks than smaller banks. In
second section, they examine the influence of the legal and institutional environment on the role
played by loan growth to counteract the impact of capital and liquidity standards on bank stability.
Results indicate that the effect of Loans on ZSCORE remains positive and statistically significant.
This indicates that although, on average, both TIER1 and LCR reduce bank stability, the effect is
counteracted by the increase in bank loans. The results are consistent with the more positive role
of capital and liquidity to promote higher bank stability through the lending channel in countries
with lower level of restrictions on banks participation in the ownership structure of non-financial
firms. This finding suggests again the positive role of Basel III new regulatory framework to
promote safer lending and increase bank

The methodology of this paper gives importance on the fact that, though it is fundamental to study
the direct impact of capital and liquidity requirements on stability, it is similarly essential to
consider the different channels of this transmission mechanism. The analysis of this paper
concluded that capital and liquidity requirements have had a negative effect on the banking sector
but this hasty conclusion would be wrong. Because of the increased level of loans, additionally of
the fact that the loan growth is related to a higher level of stability.so, further research to detect
and examine other transmission mechanisms might be incredibly valuable.

The previously mentioned positive indirect relationship is even stronger in countries with higher
level of assurance of creditor rights. The finding identified the fact that the increased level of
lending is safer and does not lead to higher level of instability if creditor rights are properly
secured. Concerning bank activity regulation, looking at the direct effects of capital and liquidity
requirements on stability, it develops that higher restrictions on non-traditional banking activities
lead to lower level of risk. The finding proposes that allowing financial institutions to expand into
non-traditional businesses may increase their risk exposure. This paper also proposes that the most
relevant role of the increased lending to promote stability takes place in countries with lower
restrictions on non-traditional financial activities. The paper remarks the importance of permitting
banks to engage in activities different from traditional ones, in order to diversify their risk exposure
and upgrade their stability levels. The closer investigation on the lending channel provides crucial
information to evaluate the impact of capital and liquidity requirements on bank stability.
With regards to the introduction of new regulatory requirements, policymakers should deal not
just with the direct effects of their decisions, but also to any indirect transmission system that could
completely revert the overall effects of their corrective actions.