Bank interest rate spread hits 40-month high

The interest rate spread – the difference between deposit and lending rates – hit a 40-month high of 3.29% last July when the monetary policy was unveiled for the second half of the year, creating a scope for banks to increase their lending rates by more than 1%.

Bankers expressed their satisfaction, saying that a spread of at least 3% is required for a bank to cover its running costs comfortably.

According to data from the Bangladesh Bank, banks received deposits at an average interest rate of 4.46% in July and lent the funds at 7.75% interest.

A higher spread of 4.07% was recorded in March 2020, when the interest rates on deposits and lending were 5.51% and 9.58%, respectively.

The central bank's data showed that most banks started increasing their deposit interest rates in November last year, but due to the interest rate cap, they could not increase the lending rate. For this reason, the interest spread has been on a decreasing trend over the last few months.

Md Ahsan-uz Zaman, managing director at Midland Bank Limited, told The Business Standard, "Every bank is increasing the deposit interest rate. However, they are not raising it at the same rate. Some banks are increasing it more to collect deposits.

A senior central bank official said that from April 2020, the Bangladesh Bank would cap the deposit and lending rates at 6% and 9%, respectively.

But the central bank, in the new monetary policy, lifted the lending rate cap and introduced a market-driven reference lending rate for all types of bank loans.

The reference lending rate, known as "SMART" (six-month moving average rate of Treasury bill), will be announced monthly through the Bangladesh Bank's website, with a margin applied for banks and non-bank financial institutions (NBFIs). In practice, SMART plus a margin of up to 3% will be applicable for banks.

However, the lending activities for CMSMEs and consumer loans may be subject to an additional fee of up to 1% to cover supervision costs, and there will be no changes in the interest rates applicable to credit card loans.

SMART was 7.10% in June. Accordingly, banks have the opportunity to charge a maximum landing rate of 10.10% in July. Basically, this is why the banks have increased the interest rate spread.

Anis A Khan, former chairman of the Association of Bankers, Bangladesh (ABB), told TBS, "Banks now have to do loan provisioning. As a result, banks have to manage the amount of this provisioning by increasing the landing rate."

"They are not increasing the rate of deposit compared to that. Instead of collecting new deposits, banks are focusing on collecting old loans. Due to these reasons, the interest rate spread has increased in July," he added.

A loan loss provision is an income statement expense set aside as an allowance for uncollected loans and loan payments. This provision is used to cover different kinds of loan losses, such as non-performing loans, customer bankruptcy, and renegotiated loans that incur lower-than-previously estimated payments.

However, in the coming days, banks may have to increase the deposit rate as they will have to increase their deposits, said the seasoned banker.

"Because if deposits decrease, a bank has to face various problems," he added.