Deposit-lending rate gap widens

The interest rate spread in the country's banking system increased further in September 2020 as banks slashed rates on deposits more than those of lending.

The weighted average spread between lending and deposit rates offered by commercial banks rose to 3.0 percent in September from 2.87 percent a month ago. It was 4.07 percent in March.

The weighted average rate on deposits came down to 4.79 percent in September from 4.95 percent in August, while such rate on lending fell to 7.79 percent from 7.82 percent, revealed the Bangladesh Bank (BB)'s latest statistics.

The existing upward trend in spread may continue in the coming months as the banks are slashing their interest rate on deposits continuously, according to bankers.

The availability of low-cost funds pushes up the banks to cut their interest rate on deposits that are affecting the small savers heavily, they explained.

Expansionary monetary policy of the central bank along with the implementation of the government's stimulus packages aiming to speed up recovery of the pandemic-hit economy have pushed up higher inflow of liquidity in the banking system.

Meanwhile, the overall excess liquidity with the commercial banks hit all time high  at around Tk 1.60 trillion in August 2020 from Tk 1.41 trillion a month before.

Syed Mahbubur Rahman, former chairman of the Association of Bankers, Bangladesh (ABB), said the interest rates on lending will be decreased in the coming months mainly due to higher liquidity in the market.

"We're now offering at below 9.0 percent interest rate on lending only to the 'good borrowers' aiming to invest our excess liquidity," Mr. Rahman also managing director and chief executive officer of Mutual Trust Bank Limited, explained.

Ali Hossain Prodhania, managing director of Bangladesh Krishi Bank (BKB), said both interest rates on lending and deposit may fall further because low-cost funds are available in the market.

"The interest rate spread is likely to increase slightly in the near future," the senior banker predicted.

Average spread with state-owned commercial banks (SoCBs) was 2.09 percent in September, 3.01 percent with private commercial banks (PCBs), 6.15 percent with foreign commercial banks (FCBs) and 1.99 percent with specialised banks (SBs).

In April, the spread dropped significantly to 2.92 percent from 4.07 percent in March following the implementation of the single-digit interest rate in the banking sector.