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Deposit-rate cap lifted

Now banks can offer highest rates on funds

FE REPORT | December 13, 2023 00:00:00

Banking industry is finally open for competitive operations with the interest-rate cap on deposits lifted, in a development that comes amid liquidity crunch and certain market distortions.

Bangladesh Bank (BB) Tuesday withdrew the interest-rate cap to unshackle bankers for collecting deposits of three months and above, thus making the interest regime market-based.

The central bank now did it as the interest rate on lending has already been made market-based.

The BB announced this decision through a circular issued by the Banking Regulations and Policy Department (BRPD).

Spokesperson for the central bank Md Mezbaul Haque told the FE that the banks will collect deposits by giving rational rate of interest on time deposits.

"Now the market is open-there is no lower limit for interest on deposit. Banks will collect deposit at interest rates as they wish to provide."

However, the deposits in fixed accounts surged to some extent in the last quarter. It increased 4.33 per cent at the end of the quarter to September.

The proportion of fixed deposits to total deposits is over 44 as of September 2023.

But there is liquidity pressure on the banking industry, especially in the Sharih-based banks as they experienced certain unwarranted happenings.

However, the BB in a circular issued on August 8, 2021 had said that the interest-rate limit on deposit collection was fixed.

So, there should not be a minimum interest rate on deposits as well. Due to this, the August 8, 2021 instruction stands cancelled.

In that directive the central bank asked all the scheduled banks not to keep the interest rate below the inflation rate prepared by Bangladesh Bureau of Statistics or BBS each month.

The banks will apply such rates on all types of time deposits or such other funds like provident funds of state-owned and private entities.

Earlier, the maximum interest rate for disbursement of loans was 9.0 per cent, and since July, it has been withdrawn replacing the SMART, a market-based interest-rate system for lending.

Bankers welcome the decision, saying that the interest regime is now market-based and will encourage competition in banking industry.

Syed Mahbubur Ragman, managing director and CEO of Mutual Trust Bank or MTB, says the market is now open for deposit collection, "so this is a good move".

"I welcome the market-based deposit collection-those who need funds will offer highest rates," he adds.

The leading banker mentions that earlier the banking industry would pay for inflation but it is now open.

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