BB Slashes Penal Interest on Overdue Loans to 0.5% to Boost Investment

In a move to provide relief to borrowers, Bangladesh Bank (BB) has reduced the maximum penal interest rate on overdue loans from 1.5% to 0.5%. The central bank aims to stimulate investment and productivity amid ongoing global economic challenges.

The Banking Regulation and Policy Department (BRPD) issued the directive on Wednesday, effective immediately. Under the new rules, banks can charge a maximum of 0.5% penalty on the outstanding balance of demand loans or on the specific overdue installment of term loans.

While the central bank views this as a necessary step for economic growth, senior bankers have voiced concerns. Many argue that lowering the penalty by 100 basis points will weaken repayment discipline.

"High penal rates serve as a deterrent. Reducing them may encourage habitual defaulters and put additional pressure on bank profitability," said a managing director of a private commercial bank. Some officials also warned that banks might compensate for the loss by increasing regular lending rates, potentially raising the burden on honest borrowers.

Despite these concerns, the central bank maintains that the policy is vital for supporting businesses in the current economic climate. All other provisions regarding market-based interest rates remain unchanged.