FCBs have high spreads

FE Report | Published: February 13, 2014 00:00:00 | Updated: November 30, 2026 06:01:00

The higher lending rate and lower deposit rate offered by some banks has led to high spread in the country's banking system, the central bank findings have revealed.
The Bangladesh Bank (BB) in its study report titled "A Comparative Analysis of Interest Rate Spread in the banking System," also termed the existing weighted average interest rate spread (WAIS) method excluding small and medium enterprises (SME) the 'best method' for monitoring interest rate spreads on a monthly basis.
The central bank released the study report Wednesday in its website.
Conducted by a six-member BB team, the study was to calculate interest rate spread by using different methods for last five years of types of banks, and to compare the spreads of different methods for policy purpose.
The analysis of market share of financial intermediation in the banking system shows that private commercial banks (PCBs) and foreign commercial banks (FCBs) appear as a market leader over state-owned commercial banks (SoCBs) and specialised banks (SBs) to intermediate financial sources (both deposit and advances).
The share of PCBs and FCBs deposit in total deposit was 32.0 per cent in 1990 which increased to 38.2 per cent in 2000 and sharply increased to 69.0 per cent at the end of March 2013, according to the study.
The share of advances to total advances rose for PCBs and FCBs to 72.12 per cent at the end of March 2013 from 35.4 per cent in 1990.
Hence to a certain extent, the pricing of loan and deposit depends on price setting by PCBs and FCBs, the study said.
"So the higher lending rate and lower deposit rate offered by some PCBS and FCBs lead to high spread in the banking system of Bangladesh."
Historical data using the WAIS method indicates that the annual average spread in the banking system was more than 5.0 percentage point since fiscal year (FY) 2001 up except in FY 2009.
The spread was 6.72 percentage points in FY 2001 which gradually came down to 4.86 percentage points in FY 2009 and again it increased to 5.60 percentage points in FY2012.
"The last few months show that spreads are generally declining," it said, adding that the FCBs have the highest spreads.
Many countries use the banking spread indicator for monitoring efficiency of overall sector but not as a regulatory tool compelling banks to reduce spreads below a certain threshold, according to the study.
"BB management will need to assess the merits of having a target spread level as a regulatory tool compared with having it only for monitoring purposes," the study recommended.
In a liberal interest rate regime, the banks are allowed to set deposit and lending rates except for pre-shipment export credit and agriculture loans.
The central bank monitors interest rate spread and the Statistics Department of BB calculates the spread as difference between WAIS.
"However, this methodology is sometimes called into question which prompted us to carry out a study comparing various potential methods," it explained.