Banks’ interest spread drops below 3pts for 1st time

HM Murtuza | Published: 22:26, Jul 12,2020

 
 

A file photo shows clients queuing up while officials in protective gears giving services at a branch of a private bank in the capital amid the coronavirus outbreak in the country. The overall weighted average interest rate spread in the country’s banking sector fell below 3 percentage points for the first time amid enforcement of the 9-per cent ceiling on the lending rate and credit demand fall during the coronavirus pandemic. — New Age photo

The overall weighted average interest rate spread in the country’s banking sector fell below 3 percentage points for the first time amid enforcement of the 9-per cent ceiling on the lending rate and credit demand fall during the coronavirus pandemic.

According to the Bangladesh Bank data, the overall weighted average interest rate spread in banks dropped to 2.94 percentage points in May from 4.07 percentage points in March.

In April, the first month of the lending rate ceiling implementation, the spread was 2.92 percentage points.

In January 2019, the overall weighted average interest rate spread was 4.42 percentage points.

Officials of the central bank said, ‘The spread dropped below 3 percentage points mainly because of the cap imposed on the banks’ lending rate.’

The government in February this year asked all the scheduled banks to implement the much talked about lending rate ceiling from April 1 this year amid opposition from the bank owners.

In September last year, the overall weighted average interest rate spread dropped to 3.91 per cent, the lowest since 1975 when the central bank started keeping records of the weighted average interest rate spread.

The weighted average interest rate is the difference between the weighted average lending rate and the weighted average deposit rate in banks.

‘I am not that satisfied with the reduced interest rate spread as it did not happen because of the banks’ enhanced efficiency but rather due to the lending rate ceiling imposed by the central bank,’ former BB governor Salehuddin Ahmed told New Age.

The banks went for the easier ways to bring down the interest rate spread, including job cuts and reduced loan disbursements to small and medium entrepreneurs, he said.

‘It would be satisfying to me if the banks had managed to lower the non-performing loans and deficit in provisioning to bring down the interest rate spread,’ Salehuddin said.

On the other hand, the banks also reduced the deposit rate as a means of reducing the spread which in turn has discouraged small savers from keeping money in the banks, the former BB governor said.

The SMEs were also deprived of loans as the banks preferred to issue credit worth Tk 100 crore to one large borrower rather than loaning the same amount to 100 or more small borrowers, he added.

The private sector credit growth in May stood at 8.86 per cent after dropping to a record 8.83 per cent in April this year.

Although the overall spread in the banking sector dropped, 13 banks still have a spread above the Bangladesh Bank-set limit of 4 percentage points.

The banks which have a weighted average interest rate above 4 per cent are Modhumoti Bank, Dutch-Bangla Bank, Woori Bank, Citibank NA, the State Bank of India, Standard Chartered Bank, the Hong Kong and Shanghai Banking Corporation, Bank Al-Falah, the Commercial Bank of Ceylon, Community Bank Bangladesh, Shimanto Bank, Pubali Bank and BRAC Bank.

In March 2018, the BB reduced the spread by 1 percentage points from 5 percentage points as part of the government’s move to bring down the lending and deposit rates to 9 per cent and 6 per cent respectively.

Even after imposing the cap on the spread at 4 percentage points, the average spread in the foreign commercial banks remained high at 5.39 percentage points based on a weighted average deposit and advance rate of 2.74 per cent and 8.13 per cent respectively.

In May this year, the spread in the private commercial banks came down to 2.97 percentage points as their weighted average deposit and lending rate dropped to 5.64 per cent and 8.61 per cent respectively.

In the state-owned banks, the rate dropped to 2.23 percentage points with the weighted average deposit and lending rates standing at 4.34 percentage points and 6.57 percentage points respectively.

In the specialised banks, the weighted average deposit rate was 5.62 per cent and the lending rate was 7.65 per cent, taking the spread to 2.03 percentage points.

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