BB issues guideline for NBFIs on viable interest rateStaff Correspondent
Bangladesh Bank on Tuesday issued a guideline for non-bank financial institutions on base rate system so that they could offer a reasonable interest rate of their different products to the clients.
A BB official told New Age on Tuesday that the base rate could be described as the minimum interest rate below which it was not viable for an NBFI to lend money to the clients.
Besides, the clients will be able to get loans from the NBFIs with a reasonable interest rate as the base rate will indicate the viable interest rate of the institutions, he said.
The BB issued a circular to managing directors and chief executive officers of all the non-bank financial institutions asking them to implement the guideline from January 1, 2014.
The base rate of the NBFIs will be set by counting their cost of fund, cost of CRR and SLR, cost of administration and cost of their equity capital, he said.
The introduction of the base rate has several benefits in the financial sector, as it promotes transparency in setting the interest rate for different products and encourages healthy competition in the economy, he said.
According to the BB guideline, the base rate system may prevent undercutting in interest rates due to competition, increase the credit flow to small borrowers at a reasonable rate of interest and also prevent the NBFIs from overcharging against their customers, and safeguarding the interest of low-income people.
The BB official said, ‘Our neighbouring countries like India, Nepal and Bhutan have already implemented the guideline on the base rate system. India and Bhutan imposed an embargo to offer the interest rate below the base rate. We, however, are yet to take such initiative for the NBFIs.’
The interest rate-setting mechanism in the base rate system, however, may not be applicable for farm loans, loans linked to different refinance schemes, staff incentive loans, and loans against fixed deposit, the BB guideline said.
The NBFIs are required
to review the base rate on a monthly basis with the approval of their respective board or the asset liability management committees as per the NBFI’s practice, the guideline said.
Since transparency in the interest rate of lending products has been a key objective, the NBFIs are required to exhibit the information on their base rate at all the branches and also on their web sites, it said.
Changes in the base rate should also be conveyed to the general public from time to time through appropriate channels, the BB guideline said.
The base rate system would be applicable for all new loans and for those old loans of the NBFIs that come up for renewal, it said.
The NBFIs will have to submit their base rate report as per the BB formats within the 15 days of the following month as well as send an electronic version of the report to the central bank through email, the BB guideline said.
Consolidating the monthly data of the NBFIs, the BB will prepare and publish a monthly cost of funds index (CoFI) on its web site which will ultimately serve as the reference rate for setting a variable interest rate for their different loan products, the guideline said.
In setting the interest rate on a new loan, the NBFIs will add a margin with the CoFI as per their evaluation of risk associated with the particular borrowers, it said.
The BB official said that such type of index would protect the clients from illogical interest rate setting by the NBFIs.
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