Banks are lowering the interest rate on deposits continuously to match their earnings with expenditures, bankers said Thursday.
The interest rate on deposits, particularly fixed ones, dropped around 3.0 percentage points in September last compared to the corresponding period of the previous year, according to the bankers.
They feared that a significant portion of bank deposit may shift into different areas including risky ones if the declining trend of interest rate on deposits continues.
A small amount of bank deposit has already been shifted into the national savings certificates because of higher yield on the government instruments, they explained.
Net sale of the national savings certificates increased by 225 per cent to Tk 68.20 billion in the first quarter of the current fiscal year (FY) 2014-15 from Tk 20.97 billion in the same period of the previous fiscal.
After slashing of the interest rate on deposits, most of the banks cannot achieve the optimum level of their profitability due mainly to rising trend of the non-performing loans (NPL), the bankers observed.
The volume of default loans increased by 6.58 per cent to Tk 513.44 billion in the April-June period of 2014 from Tk 481.72 billion in the previous quarter of this calendar year.
"We're compelled to reduce the interest rate on deposits for minimising our cost of funds," a senior official of a leading private commercial bank (PCB) told the FE.
The deposits cover tenure between three months and 12 months and are prime sources of the fixed deposits which have contributed around 90 per cent of total bank time deposits.
He also said the interest rate on deposits may fall further in the coming months due to the squeezing of investment opportunities in the wake of political uncertainty.
The interest rate on fixed deposits came down to around 8.0-9.0 per cent in September last from 11-12 per cent a year ago, he added.
"We're holding adequate liquidity right now because of lower credit demand in the recent months," the private banker explained.
He also said the growth of deposit is still higher than that of the credit despite of slashing the interest rate on deposits recently.
The overall excess liquidity with the commercial banks stood at around Tk 1.32 trillion as of first week of September last but major portion of the funds has been invested in the risk-free government securities, a senior official of the Bangladesh Bank (BB) said.
He also said excess reserve, generally known as excess over daily minimum cash reserve requirement (CRR) with the central bank, stood at Tk 28 billion.
On the other hand, the weighted average spread between lending and deposit rates offered by the commercial banks rose to 5.10 per cent in September 2014 from 5.01 per cent in the corresponding period of the last calendar year as the interest rate on deposit decreased more than that of lending.
"We're now offer lower interest rates on lending only for priority customers who now prefer foreign currency loan from overseas sources due mainly to lower interest rate," another private banker said.
He also said some banks have already slashed interest rates on lending aiming to expedite their credit flow to the private sector in line with the central bank advice.
The BB earlier advised the banks to take necessary measures for boosting disbursement of credits to the private sector in line with the current Monetary Policy Statement (MPS).
The central bank has set the private sector credit growth target at 16.5 per cent for the July-December period of the FY'15.
During the period, the weighted average rate on overall deposits dropped to 7.48 per cent from 8.50 per cent while the average interest rate on lending came dawn to 12.58 per cent from 13.51 per cent, according to the central bank statistics.
The central bank earlier asked the commercial banks to keep interest rate spread at less than 5.0 per cent, barring operations relating to credit cards and small and medium enterprises (SMEs).
"The BB is now trying to bring down the interest rate spread below 5.0 per cent to facilitate the country's business activities," another central banker said.
The country's business community earlier urged the BB Governor to reduce the lending rates to facilitate business activities, particularly to augment industrialisation in the country.
The BB official also said outstanding deposit balance and credit are increasing continuously in terms of volume but the deposit growth is comparatively high than that of credit.
All banks' deposit balance excluding inter-bank rose to Tk 6760.24 billion as of September 18 last from Tk 5924.82 billion as of September 26, 2013 while outstanding loan excluding inter-bank stood at Tk 4932.66 billion from Tk 4426.22 billion, the BB data showed.
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