Central bank takes hardline on higher deposit-lending spread

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Siddique Islam
The Bangladesh Bank (BB) is going to take a hard-line against the commercial banks that are maintaining over 5.0 per cent spread between lending and deposit rates, official sources said.
The central bank will impose restrictions on some major expansionary activities including issuance of licence for authorised dealer (AD) branch, generally known as foreign exchange branch, and approval for opening of new branches.
The indirect interventions may take place after conclusion of the consultations with the banks that are maintaining such spread, the sources added.
The central bank will take the move against the backdrop of rising trend of spread in June last that may affect competitiveness of local entrepreneurs in the global market.
Officials concerned of the BB have already discussed the matter with 19 commercial banks and the discussion will resume further after the Eid-ul-Fitr festival.
The BB earlier asked 27 commercial banks, which have spread of over 5.0 per cent between lending and deposit rates, to explain their positions.
"We are thinking a lot to reduce the spread at a tolerable level," a BB senior official told the FE Wednesday, adding that the central bank may update the format that is used for reporting on spread by the commercial banks to avoid any ambiguity in this connection.
"We may use our tools to protect depositors' interest," another BB official told the FE, adding that the central bank is pursuading the banks to reduce the spread through improvement of efficiencies, but not by raising lending rates.
The weighted average spread between lending and deposit rates in the country's banking sector stood at 5.93 per cent in June 30, 2007 against 5.74 per cent of March 31 last.
The weighted average rate on lending stood at 12.78 per cent in June last while the interest rate on deposit was 6.85 per cent, according to the central bank statistics.
The spread being maintained by at least 16 commercial banks out of 48 are still between over 6.0 and 10 per cent, while the average spread of the nationalised commercial banks (NCBs), private commercial banks (PCBs), foreign commercial banks (FCBs), specialised banks (SBs) is 6.04 per cent, 5.69 per cent, 8.77 per cent and 2.94 per cent respectively.
The country's business community earlier urged the governor of central bank for taking initiatives to reduce lending rates to facilitate business activities, particularly for industrialisation in Bangladesh.
They said the interest rates on lending will go up if the spread increases, which may erode competitiveness of local entrepreneurs in the global market.
On the other hand, bankers alleged that some factors, including administrative cost, are not considered properly by the central bank while calculating the spread.
The central bank is calculating the spread on the basis of weighted average rates of interest on deposits and lending.