MICROCAPITAL BRIEF: Bangladesh to Mandate More Bank Lending to Farmers at Interest Rates Below 10%

Bangladesh Bank, the central bank of the country, reportedly is drafting a policy to reduce the microloan interest rates that some farmers pay from a range of 20 percent to 25 percent to a range of 9 to 9.5 percent.

Banks currently must direct 2.5 percent of their loan volume to farmers at a rate of 9 percent per year. They are allowed to meet 70 percent of this mandate through microfinance institutions (MFIs), which borrow from the banks at 9 percent and then charge farmers 20 to 25 percent.

The new policy would decrease the amount that can be lent via MFIs from 70 percent to 50 percent. It would also increase the amount banks can charge farmers from 9 percent to 9.5 percent when lending via the banks’ agents.

Banks have been keen to meet much of the farm-loan mandate via MFIs because this can “cut their supervisory- and recovery-related costs.” On average, during the 2017-2018 fiscal year, banks subcontracted 37 percent of their farm lending to MFIs. However, 26 banks reportedly exceeded the 70-percent limit. Although, no penalty has been levied against these lenders to date, Bangladesh Bank reportedly plans take action against violators, including lowering their CAMEL rating.

By Michelle Fleming, Research Associate

Sources and Additional Resources

The Daily Star article
https://www.thedailystar.net/business/bangladesh-bank-low-interest-loans-for-agriculture-new-policy-shield-farmers-1668949

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