Interest rate spread in the banking sector declined further in May as most of the scheduled banks were compelled to reduce rates of interest on their lending and deposit products amid dull business due to political uncertainty.
According to the latest Bangladesh Bank data, the overall interest rate spread, the gap between the interest rate on credit and deposit, decreased to 4.83 percentage points in May from that of 4.84 percentage points in April this year. The spread was 4.87 percentage points in March.
The interest rate spread had decreased to five percentage points in January 2014 but after the month the rate hovered around more than five percentage points in 13 consecutive months, according to the BB data.
The spread, however, declined below five percentage points again in March this year.
According to BB directives, banks have to maintain the spread rate below five percentage points.
But banks frequently violated the rules to earn quick profit imposing more interest rate on lending against lower rate on deposit.
BB officials said that the spread rate had gone down in January 2014 as the business sector suffered a setback amid a political turbulence due to holding of the one-sided national elections in the month.
The latest drop in the spread rate occurred as the businesspeople were still maintaining a go-slow policy to their business expansion, they said.
The decline will be proved positive if the business environment becomes vibrant, the officials said.
The credit demand from the private sector continued to maintain a slower pace that fuelled the excess liquidity in the majority of the banks in recent period.
According to the BB data, the year-on-year credit growth rate in the private sector stood at 11.57 per cent in May against 13.27 per cent in April.
The officials said that although the rate rose slightly in May, it still remained well below the target of 15.50 per cent to be achieved by June as per the monetary policy statement.
They said that the banks cut their rate of interest on lending over the year to encourage the entrepreneurs but their (businessmen) feedback is yet to reach a satisfactory level.
Due to the lower credit disbursement, banks also cut the rate of interest on deposit to discourage the depositors so that they (banks) get a respite from the burden of paying the interest, a BB official said.
The weighted average rate on lending stood at 11.82 percentage points in May while the interest rates on deposits were paid at 6.99 percentage points, the BB data showed.
In April this year, the average lending rate was 11.88 percentage points and average deposit rate was 7.04 percentage points.
The BB official said that the interest spread rate in the banking sector would decline more in June as the central bank postponed the
auction of Treasury bond during the month.
Due to the postponement of the T-bond auction, banks were facing more pressure from their idle liquidity between June and May that forced them to cut the rate of interest on the deposit products, he added.
Source: New Age