The aggregate banking interest rate spread fell below 5% in April, for the first time in two years, thanks to a surplus liquidity in the banking system.
The commercial banks reduced their interest rates both on lending and deposits, which contributed to reducing the spread – the difference between lending and deposit rates – to 4.99% in April, according to latest figures from Bangladesh Bank.
The weighted average interest rate on loans and advances was 13.64% and on deposits 8.65% in April. But 24 out of 48 banks, mostly foreign ones, still failed to follow the directives of the central bank to cut down the interest rate spread to a desired level of 5%. The spread of 18 banks is more than 5%. Six banks, mostly foreign ones, have more than 7%.
“Continuous low demand for credit by the private sector has bolstered surplus fund of banks, leading to cut their lending and deposit rates that helped bring down the spread,” said credit department head of a private bank.
The private sector credit growth went down to a 10-year low to 12.72% in April, according to the central bank. When the private sector borrows from banks it shops around, negotiates borrowing rates and, in case of large deposits, somewhat dictates on deposit rates as well, said treasurer of a local bank.
“This leaves little room for banks to continue to charge high interest rates without adequately increasing the deposit rates and that narrows down the spread,” he said.
Bankers, however, claim that banking spread may continue to decline as private sector credit growth might fall further ahead of national election. “Spread might come down further due to continued lower demand of credit growth in the election year,” said M Haider Ali Miah, managing director of EXIM Bank.
Six out of nine foreign commercial banks operating in the country did not comply with the desired spread rate and their weighted average advance rates were higher than the local banks.
The foreign banks are Standard Chartered Bank, Citibank NA, Commercial Bank of Ceylon, Woori Bank, HSBC and Bank Alfalah.
Sixteen local private banks failed to comply with the spread. They are AB Bank, National Bank, The City Bank, United Commercial Bank, Pubali Bank, Uttara Bank, Eastern Bank, Prime Bank, Dhaka Bank, Social Islami Bank, Dutch-Bangla Bank, ONE Bank, Bangladesh Commerce Bank, Premier Bank, Jamuna Bank and BRAC Bank.
The private banks’ excess fund has now reached a two-year high due to a slowdown in the investment demand. Banks’ loanable funds rose by over Tk23bn to nearly Tk695bn in the first ten months of the current fiscal year, according to Bangladesh Bank.
