Interest spread widens to 4.66% as banks opt for more profit

The gap between lending and deposit rates is widening as banks are charging more from borrowers than they offer depositors.

The spread – the gap between lending and deposit rates – increased to 4.66% in December last year from 3.31% in September, indicating increased profitability for banks.

According to Bangladesh Bank data, the average lending rate in the banking sector by December 2023 was 9.36%, up from 7.22% a year ago, marking a 29.64% increase. On the other hand, the deposit interest rate increased by 11.11%, with the average rate rising from 4.23% to 4.70% within the year.

Bankers said interest rates on both deposits and loans are rising as part of efforts to manage inflation, though deposit rates are increasing at a slower pace compared to loan rates. This situation means depositors are seeing reduced profits while borrowers face higher interest charges amid persistent inflation.

Despite these rate hikes, inflation levels remain high, they added. Loan interest rates have been climbing since the removal of the 9% loan disbursement cap in July 2023.

A senior central bank official said banks are always trying to increase their profits. Faster increases in loan interest rates lead to quicker profit growth for banks.

"If depositors have to wait for higher interest, even for a month, profits will accumulate in banks. Ordinary depositors are particularly affected by the slow rise in deposit rates," the officials explained.

Anis A Khan, former managing director of Mutual Trust Bank, told TBS that banks typically raise lending rates before increasing deposit rates. This competitive approach aims to maximise profits with minimal investment, affecting depositors. 

"However, decisions must balance competition and market demand to ensure bank survival amidst competition from other banks," he said.

In the past two years, inflation in the country has continued to rise, leading the central bank to adopt a contractionary monetary policy to control it. 

Since July of the current financial year, loan interest rates have surged, while deposit interest rates began to rise from last October, at a slower pace. 

With the removal of the 9% lending rate ceiling last July, banks now have flexibility in setting lending rates, but deposit rate adjustments lack a formal mechanism, resulting in minimal increases. 

Despite recent adjustments, the average deposit interest rate remains significantly lower than the inflation rate, standing at 4.70% compared to the 9.41% inflation rate in December. 

As a result, depositing money in banks is becoming less profitable, discouraging customers and leading to slow deposit growth. 

However, to prevent banks from suffering, the Bangladesh Bank lifted the upper limit on the interest rate spread to 4% in November 2023, as loan interest rates are tied to the SMART rate (six-month moving average rate of treasury bills). 

This move ensures that banks can maintain profitability by allowing flexibility in investing at higher interest rates, balancing their ability to attract deposits at lower rates.