The Federation of Bangladesh Chambers of Commerce & Industry (FBCCI) has stirred up the debate over lending rates with an official representation to Bangladesh Bank Governor Atiar Rahman for a further reduction in such rates.

The apex chamber wants these rates to be brought down to 11% for now and ultimately into single digits. This comes barely a few months after the central bank weighed down on private banks forcing a capping of lending rates to 13% sans personal and home loans.

Whether the strategy was for the 13% cap to be an intermediary measure to allow the impact on depositors to pan out is not known but the business circles have long been clamouring for single digit rates in line with neighbouring countries. They obviously have their reasons -- cost of doing business but what about that of banks? The banking sector has emerged as one of the most viable sectors of the economy with significant employment being generated. And what they don't like in a convertible free market economy is being forced into a rate-cut war.

Currently there is a liquidity glut with most banks not finding entrepreneurs who want loans to invest. That is the result of the global slow-down but the predictions are for a turnaround in global financial institutions in 2010. That's when credit will be pumped back in to the economy. Couple that with government beginning to spend money, when it will inevitably borrow thus siphoning of a major chunk of the available liquidity. That's when private banks in particular will scramble for fresh funds and look towards the depositor.

The lonely animal, the depositor will then look for the best bet in terms of interest rates-that under normal circumstances would have gone up with a subsequent hike for borrowing concerns. Now that a cap is in place and if a further reduction cap is introduced, deposit rates will vary minimally. In such a case, the foreign banks would benefit because they have never allowed interest rates to go above mid-single digit numbers against the high borrowing rates. In such a case private banks have essentially one option -- reducing costs through operations and employment rationalisation. That then has an impact on their corporate social responsibility (CSR) programmes, their philanthropy and even branding. It's a vicious circle.

Essentially, the Bangladesh Bank wants that the private banks keep a maximum spread of five percentage points between deposit and lending rates. While that appears as a high number, it is one that banks have to fall back upon in absence of any major charges that they can levy. Bangladesh, especially the businessmen still have not become accustomed to the cost of banking and charges. Therefore, if the cap comes to 11%, deposit rates then have to fall to 6%. That's a politically unacceptable decision and so it will be left to the banks to make that unpopular decision. When that happens, the depositor might just opt for the safety of the multinational banks. (The writer is a former chief of corporate and regulatory affairs, British-American Tobacco, Bangladesh and former CEO of Bangladesh Cricket Board. He may be reached at e-mail: mahmudrahman@gmail.com)