Slight rise in interest rate spread in Dec '22

After months of continuous fall, the spread between the banks' lending and deposit rates went up slightly in December last apparently due to unofficially relaxing the rate cap on consumer loans four months ago.

With such a turnaround, the bankers seemed feeling a sigh of relief and were expecting even more space in the days ahead as the Bangladesh Bank (BB) last month increased the rate on consumer credit by three percentage points with lifting the minimum deposit floor rate.

According to the latest BB data, the spread between the weighted average interest rate on advances and deposits of all banks inched up to 2.99 per cent in December 2022 from 2.96 per cent in November, 2022.

The weighted average interest rate (WAIR) on deposits of all banks increased by 1 basis point to 4.23 per cent while on loans and advances rose by 4 basis points to 7.22 per cent.

The spread started squeezing from June last year when the economy came under stress due to disruptions in the global supply chain following the Covid-19 pandemic, followed by the war in Ukraine.

The spread was 3.12 per cent in June 2022. Since then, it continued to fall and stood at 3.05 per cent, 3.04 per cent, 3.03 per cent, 3.02 per cent and 2.96 per cent in July, August, September, October and November respectively.

Seeking anonymity, a BB official said the central bank unofficially relaxed the cap of 9.0 per cent on consumer loans four months ago, which might have played a major role to widen the spread.

"I think it'll increase further in the coming days as the BB last month officially increased the lending rate on consumer credit by three percentage points by lifting the minimum deposit floor rate," the official added.

The minimum deposit floor rate was the average of three months' inflation rate, and the consumer credit refers to personal loan, and loan on car, real estate, education, etc.

Terming the little increase insignificant, the bankers said the spread is still below 3.0 per cent, which in fact demonstrated how weak the financial health of the banks is.

Contacted, managing director (MD) and chief executive officer (CEO) of Jamuna Bank Mirza Elias Uddin Ahmed said the increase is too little for the banks to become sustainable.

"If we add administrative expenses like salaries and house rent, which varies from 2.0 per cent to 2.5 per cent, the spread will basically turn negative," he added.

Responding to a question, Mr. Ahmed said the banks remain profitable largely on non-funded earnings like commissions and other fees.

MD and CEO of Dhaka Bank Limited Emranul Huq said many banks used to lend money to some clients at much lower rate than that of the ceiling when the liquidity was not under stress.

"Now, the liquidity is under stress while the deposit rate goes up. Under the current circumstances, it is not possible for the banks to lend money below the ceiling. This is probably another reason behind the little increase in the spread (difference between the lending and deposit rates)," he said.

Mr. Huq recommended the policymakers to consider withdrawal of the lending rate cap. "Otherwise, the profitability of the banks will shrink further in the coming days."

MD and CEO of Pubali Bank Limited Mohammad Ali said the spread of the bank declined because of the hike in deposit rate. The spread is generally higher to the banks having higher exposure on consumer credit.

Under the current circumstances, he said, the spread should range between 3.0 and 4.0 per cent so that the credit does not become much costlier for the businesses that may create inflationary pressure.

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