The average banking spread, difference between lending and deposit rates, remained as high as more than 5.50 per cent, pushing the money market in to bad competition, official sources said. The high spread shows that banks are realising high interest rate from creditors and paying low interest to depositors, meaning higher profits for the banks.
The banks have long been asked by the central bank to bring the spread below 5 per cent but none complied.
The Bangladesh Bank (BB) data showed the weighted average lending rate for all banks in September was 13.93 per cent while average deposit rate was 8.40 per cent.

Twenty-nine banks failed to maintain the interest rate spread for lending and deposits set by the central bank, according to BB.

Interest rate spread is the interest charged by banks on loans to customers, minus the interest that banks pay against savings, deposits.

Spread of foreign banks is much higher than the local banks. Among the nine foreign commercial banks, spread of four banks--Standard Chartered Bank, Citibank NA, Woori Bank and HSBC -- crossed eight per cent in September, according to the BB data during the month of September.

The other five foreign banks having spread over between 5 and 8 per cent are State Bank of India, Habib Bank, Commercial Bank of Ceylon, Al-Falah Bank and National Bank of Pakistan.

Twenty local commercial banks, including two state-owned commercial banks and a specialised banks having spread between 5-8 per cent are Agrani Bank, Sonali Bank, BASIC Bank, AB Bank, National Bank, The City Bank, IFIC Bank, Pubali Bank, Uttara Bank, Eastern Bank, Prime Bank, Dhaka Bank, Social Islami Bank, Standard Bank, ONE Bank, EXIM Bank, Premier Bank, Jamuna Bank, BRAC Bank and Dutch-Bangla Bank.

As per the recommendation of the International Monetary Fund, the central bank in January this year lifted the cap on interests on all types of loans, except agriculture and pre-shipment exports.

“This was suicidal decision on the part of the central bank,” said Mohammad Farashuddin, an ex-BB governor.
In early 2011, average banking spread came down in the range of 4.93-4.96 per cent from its peak of 7.78 per cent three years ago.

Most depositors are of the view that the banks make profits at their cost as the banks gain from the high spread.
A BB report prepared in July said the upper cap on the rate of interest on credit was withdrawn earlier and it resulted in an upward movement of interest rate on both credits and deposits.

The borrowers complain that high lending rates are hurting business and hampering economic growth.
In some cases, cost of lending range between 18 to 27 per cent, alleged some borrowers. Some corporate loans also pay as high as more than 18 per cent interest.

The highest interest is paid by consumer loan receivers as they remain vulnerable and meet their demands for fund with harsher conditions.

“Higher interest rate will definitely stifle the growth,” said AK Azad, president of apex trade body FBCCI.

A central bank official said an unhealthy competition was going on among the banks in mobilising deposits. “So they were offering higher interest rates on deposits, and as a result the rate of interest on credit was also going up,” he said.

He also said it is worrisome problem especially for small depositors who have the major share in bank deposits but get very little in return.

The central bank earlier took action against some banks for charging higher interest rates on deposit and credit but without any effect.

“The banks imposed more interest rates on credit disbursement for earning more profit from the clients,” said a banker requesting not to be named.

He said if the rate of interest on deposit could be kept low, the rate of interest on credit would have also remained low and, resulting in the decline in spread.

News: The Daily Independent/Bangladesh/16-Nov-12