Banks fear profitability squeeze as new operational peril

Already smarting under loads of bad loans, banks in Bangladesh worry about a new operational peril from profitability squeeze for narrowing interest spread that came to 5.74 per cent in September.

According to Bangladesh Bank statistics, the spread between weighted average interest rate (WAIR) on advances and on deposits across all 61-bank industry narrowed by 2.0 basis points to 5.74 per cent last September from previous month's standing.

The contraction has stoked concerns that banks' profitability may come under further pressure at a time when the sector is struggling with a high stock of non-performing loans stemming from years of malpractice.

The decline, driven by rising deposit costs and subdued lending growth, underscores mounting stress within the financial system.

Deposit rates increased by 3.0 basis points while lending rates edged up by 1.0 basis point as of September, the central bank says, leaving smaller gains.

Spread between the two interest rates is a key indicator of operational efficiency in financial institutions, and regulators often take corrective measures when its movements signal stress.

Until the end of fiscal year 2023, banks had operated under a capped regime that set the maximum lending rate at 9.0 per cent and the maximum deposit rate at 6.0 per cent, resulting in a fixed spread of 3.0 per cent.

Sector-wise data show sharper declines in the services sector, where the spread fell by 15 basis points to 6.27 per cent in September.

By contrast, spreads in the SME segment rose by 3.0 basis points, while agriculture and large industry posted increases of 2.0 and 1.0 basis point respectively.

"Deposit rates were higher in September, which contributed to the compression in spreads," says a senior banker, speaking on condition of anonymity. "But the narrowing trend will squeeze banks' profitability if it continues."

Fixed-deposit rates for maturities of more than one year and less than three years averaged 10.06 per cent in September.

Deposits with terms of three years and above were priced at 9.31 per cent, while one-year and-below deposits averaged 9.6 per cent.

Treasury bills and bonds - which serve as benchmarks for market rates - traded below 10 per cent for most tenures, while yields on two-year and five-year bonds hovered above 10 per cent.

The central bank had revised its method for calculating interest- rate spreads to prevent banks and nonbank financial institutions from artificially lowering their reported spreads.

jasimharoon@yahoo.com