The average spread between lending and deposit rates of banks crossed 5.50 per cent despite the central bank's directive to bring down the gap to the level below 5.0 per cent, said sources with the Bangladesh Bank (BB).

Twenty-nine banks are not complying with the directive of the central bank on cutting the spread between interest rates. The spread between lending and deposit rates of the banks is more than 5.0 per cent, the latest data available with the BB shows.

Of them, six banks have the spread above 7.0 per cent and three banks between 9.0 and 12.44 per cent, according to data available with the central bank.

The lending rate means the interest rate a bank charges on a loan and the deposit rate means the interest rate it offers to a client on a deposit.

In August alone the banks' average spread stood at 5.56 per cent against 5.47 per cent in July last, as per the BB data.

The banks' average lending rate in August was 13.90 per cent against 13.77 in the previous month.

On the other hand, the deposit rate increased to 8.34 per cent in August, up from 8.30 per cent in July, the data shows.

The spread increased due to raising the lending rates by banks, BB sources said.

Most depositors are of the view that the banks make profit at their cost as the banks gain from the high spread.

In a meeting of bankers last month, all banks were told to comply with the BB directive on cutting the spread to the level below 5.0 per cent.

Chief executives of all banks attended the meeting, presided over by BB Governor Dr Atiur Rahman.

In that meeting, the BB placed a report on the rates of interest on credit and deposit for the month of July last.

The report said the upper cap on the rate of interest on credit was withdrawn earlier. It resulted in an upward trend in the rate of interest on both credit and deposit.

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.

The BB official said the spread in the private and foreign banks was much higher than that in other banks.

A bank was fined under the Banking Company Act for offering a higher interest rate than its official rate, said the report.

The BB report also said the credit flow to the small and medium enterprise (SME) sector was drying up due to the higher rates of interest.

A high official at a first generation private bank blamed some weak banks for ruing the healthy competition in the banking sector.

These banks resort to various ill practices to attract depositors, the official said, requesting not to be named. "As a result, other banks have to increase their rate of interest as well."

Another official at a private bank 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.

He said the central bank should strengthen monitoring so that the banks do not go for any unhealthy competition.

News: The Daily Financial Express/Bangladesh/21th-Oct-12