Dilemma with deposit and advance rates

The Bangladesh Bank, being the regulatory authority, has given directives to all the scheduled banks that they should downsize the deposit and lending rates to 6.0-9.0 per cent respectively. Recently, during a meeting with senior officials of the scheduled banks, the BB reiterated and instructed the scheduled banks to strictly follow the prescribed deposit and lending rates.

However, presently the deposit rates are hovering between 4.0 to 11 per cent. On the other hand, lending rates are between 6.0 to 19 per cent. The Bangladesh Bank has for long been trying to implement the managed deposit and lending rates. Under the circumstances, it is not possible to implement the prescribed deposit and advance rates for practical reasons.

The Deposit and lending rates have increased due to the liquidity crunch in the financial sector. Irregularities in the banking and Non-Banking Financial Institution (NBFIs) have constrained liquidity. Many customers are losing confidence in the financial sector of the country as a result.

This is why many banks are giving high rates to depositors to meet their short-term and long-term liquidity requirements. Presently, inter-banks call money rate are between 4.0 to 5.0 per cent. Deposit and advance rates depend on various factors and not on decisions taken by banks' managements. The factors that drive the deposit and lending rates are the cost of funds, increasing number of non-performing loans (NPLs), operating expenses and many other factors.

At this point, NPLs are soaring at an alarming level in the country. This is contributing negatively and increasing the cost of funds. As funds are stuck in NPLs and other means, this is aggravating the liquidity crunch for banks.

Depositors do not want to increase the funds that they are depositing until and unless the deposit rates are high. Moreover, inflation is 5.0 to 6.0 per cent. If deposit rates are 6.0 per cent, this would mean that depositors will actually get nothing in return against their deposits in banks.

Banking experts and economists have opined that instead of forcefully implementing the prescribed deposit and lending interest rates, the government and the BB should work together to implement good governance in the banking sector and address the issue of non-performing loans.

Mohammad Zonaed Emran,

A banker.

zonaed.emran@gmail.com