Bangladesh Bank on Wednesday cut banks’ interest rate spread by 1 percentage points and took a number of other steps to halt the rising interest rate on loans.
The BB reduced the interest rate spread, the difference between interest rates on borrowing and lending, to 4 percentage points from 5 percentage points with an immediate effect.
Interest rates on credit cards and consumer loans, however, would not be included in determining spread of banks, said a Bangladesh Bank circular issued in this regard on Wednesday.
The BB circular issued by its banking regulations and policy department said the central bank under its circulars in 2015 asked banks to limit weighted average interest rate spread of advance and lending within 5 percentage points.
The central bank, however, observed that banks were increasing rates of interest on different loan products gradually.
It also mentioned that the recent hike in interest rates on loan products as illogical and alarming.
Another BB circular said that it was observed that a number of banks increased lending rates all of a sudden, thus creating additional payment burden.
To save the customers from such shock, the central bank asked banks not to change interest rates on those loans for which interest rates are already set as ‘fixed’.
In case of floating rate loans, banks would be allowed to increase rate once in a year subject to three months prior notice to the clients.
The increase of interest rate could be 0.5 per cent for the term loans and it would be 1 per cent in case of working capital and other loans, the BB circular said.
According to the latest central bank data, as many as 36 banks have interest rate spread above 4 percentage points.
Of the banks, 11 banks have exceeded the BB-allowed limit (before Wednesday’s circular) of 5 percentage points.
Of the entities, Standard Chartered Bank has highest interest rate spread of 7.86 percentage points, while BRAC Bank and Dutch-Bangla Bank followed the chart with 7.32 and 6.83 percentage points.
When asked about the BB move to cut interest spread, Association of Bankers, Bangladesh chairman Syed Mahbubur Rahman told New Age, ‘Obviously it will have impact on the profitability of the banks.’
‘We will have to evaluate the situation and how the BB instruction could be implemented,’ he said.
‘Although the 4-per cent margin is not insignificant, the main challenge would be containing classified loans,’ he said.
Although businesses and experts have been suggesting a reduction in the interest rate spread of banks with a view to supporting the private sector, banks in last couple of months increased interest rates on loan products to more than 12 per cent against interest rates on deposit below 5 per cent.
Experts and businesses said the bank-loan interest rate in the country was inconsistent with that of the major and developed economies.
Although the BB gave a number of benefits including extended time to adjust advance deposit ratio, access to additional fund from the government entities and reduction of cash reserve ratio to get rid of the credit crisis, the lending rate of banks has remained high.
A senior BB official said that the initiative was taken with a view to bringing down the lending rate along with making the spread rate consistent with the international standard.
In January this year, the central bank asked eight banks to cut down weighted average interest rate spread within the BB-allowed limit (5 percentage points).
The banks were: BRAC Bank, Standard Chartered, Dutch-Bangla Bank, HSBC, State Bank of India, Woori Bank, Citibank and Uttara Bank.
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