Average deposit rate reach 4.38% in April – highest in 25 months

The weighted average interest rate on deposits in the country's banking sector reached 4.38% in April this year, highest in 25 months, according to the latest central bank data, as cash-strapped banks have been desperate for deposit collection.

Earlier, the rate was 4.40% in March 2021 and since then it has been on the decline with some fluctuations.

Sector insiders said some weak banks are collecting deposits at higher rates which is the key reason behind the surge in weighted average interest rate on deposits.

"The liquidity situation is fine in good banks, but there are some banks which are in liquidity stress. The stressed banks are offering higher interest rates to collect deposits. This has increased the overall deposit interest rate in the banking sector," Mohammad Ali, managing director and CEO of Pubali Bank, told The Business Standard.

Among 61 banks operating in the country, a total of 7 banks are collecting deposits at above 6% interest. Of them, Padma Bank, one of the top weak banks, is offering the highest 7.86% interest rate on deposits, followed by 6.78% of Union Bank and 6.63% of Global Islami Bank.

In spite of the rise in weighted average interest rate, the interest rate spread –difference between lending rate and deposit rate – of banks fell by 5 basis points month-on-month to 2.91% in April, according to the Bangladesh Bank.

The rate was lowest in 32 months as the previous lowest was recorded at 2.87% in August 2020.

Bankers believe interest rate spread should always be above 3% in the Bangladesh perspective while 2% is for operating costs and the 1% for provisioning and other expenses. Lower interest rate spread can affect foreign trade, they said.

The spread, however, has been below 3% for the last six months.

"Due to increases in non-performing loans, returns on assets are decreasing. It is one of the reasons for the decrease in lending rates as well as interest rate spread," Association of Bankers Bangladesh Chairman Selim RF Hussain told TBS and added that growing deposit rate is also affecting the spread.

Banks are not able to charge more interest due to the 9% cap, he noted.

According to the Bangladesh Bank, the total amount of default loans reached Tk1.20 lakh crore in December. At the end of December 2022, there were 72,189 cases pending in the money loan court involving Tk1,66,886 crore. The number of cases increased by 3,918 that year compared to that of the previous year, while claimed money surged by Tk23,192 crore.

Central bank data also said the average loan interest rate fell by 2 basis points in April compared to that of the previous month.

Mohammad Ali sees the role of the bank's excess liquidity in reducing the lending rate. "The banking sector now has excess liquidity of Tk1.35 lakh crore. As a result, the lending rate has decreased slightly, causing further narrowed interest rate spread," he added.