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Dhaka Tribune

Bank interest rate spread exceeds 5% after 9 years

Overall interest rate spread rose to 5.04% in February 2024, highest after February 2015 when it was at 5.04%

Update : 22 Apr 2024, 06:37 PM

The weighted average interest rate spread in the local banking sector exceeded 5% in February after 2015, driven by rising lending rates.

According to Bangladesh Bank data, the overall interest rate spread rose to 5.04% in February 2024 compared with 4.66% in December 2023, and significantly up from 2.93% in June 2023.

The spread was highest after February 2015 when it was at 5.04%.

The introduction of a lending rate cap at 9% from April 1, 2020 led to a sharp decline in the interest rate spread at that time.

However, the spread began to increase after the central bank removed the 9% lending rate cap in July the following year.

Currently, some banks are charging close to 13% for loans, while deposit rates have been increasing gradually, albeit slower than lending rates, contributing to the spread reaching 5%.

They said that lending rates typically rose before deposit rates.

Banks assess deposit rates in competitors before raising the rate, they said.

They said that an increased interest rate spread contributed to attaining higher operating profits by banks.

In February, banks offered an average interest rate of 5.01% for deposits and charged an average of 10.05% for loans, resulting in a spread of 5.04%.

In comparison, in February 2023 banks offered an average deposit rate of 4.31% and charged 7.27% for loans, resulting in a spread of 2.96%.

The Bangladesh Bank scrapped the limitation of keeping spread below 4% in November 2023 as lending rate is now connected with Smart.

To ensure sustainable business operations, banks must maintain a certain profit margin.

Bankers attribute the recent increase in lending and deposit rates to the central bank’s shift from a monetary targeting framework to an interest rate targeting framework to curb inflationary pressures.

Under the new framework, the lending rate for banks is determined by adding a 3.5% corridor to the six-month moving average interest rate (Smart) of the 182-day treasury bill.

This shift has led to an increase in policy rates, prompting banks to raise lending and deposit rates to make financing more expensive.

While lending rates have been raised, there has been no systematic increase in deposit rates, which has resulted in deposit rates remaining significantly below the country’s inflation rate, which has been above 9 per cent for the past six months.

The inflation rate was 9.66% in February against a deposit rate of 5.01%.

Therefore, many people were reluctant in keeping their money in banks, which adversely affected deposit growth in the banking sector.

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