IMF links higher spreads to banking sector inefficiency

---

FE Report
Higher lending rates and persistently high interest rate spreads are the main reasons for weak financial intermediation and inefficiencies in the banking sector of Bangladesh, said International Monetary Fund (IMF).
"Bangladesh's bank lending rates are on average around 15 per cent with some rates much higher. Interest rate spreads have remained high at between 6.0 and 8.0 per cent since 1993," the IMF said an evaluation report.
The lending rates are relatively high compared to those of other Asian countries where they are between 8.0 and 12 per cent on average although inflation rates are at similar levels, it said adding that the higher lending rates could reflect perception of higher risk in Bangladesh.
It said interest rate spreads have remained around 6.0 per cent on average as both lending and deposit rates have remained high over the last six years. Consistent with inflation developments, average lending and deposit rates for the sector as a whole declined in 2003, but have been rising over the last two years, it added.
Since mid-1990, macroeconomic stability, liberalisation measures, and regulatory reforms have helped strengthen the financial sector and encouraged the entry of private and foreign banks and of non-blank financial entities.
However, the predominance of weak, large state-owned banks, even though their market shares are diminishing, has prevented high intermediation costs from declining following increased competition.
The IMF said Bangladesh's financial system is relatively shallow. Total financial sector assets amount to about 69 per cent of Gross Domestic Product (GDP), with banking sector assets accounting for the bulk of assets or 58 per cent of GDP.
Capitalisation of the securities market amounts to another 6.0 per cent of GDP, and the remainder represents estimated assets of insurance companies, non-bank financial institutions, and micro-finance.
It said private commercial banks and the stock exchanges have seen the most rapid growth in the last five years.
Assets of domestic private commercial banks increased from 19 per cent of GDP to 29 per cent of GDP between 2001 and 2006, it said adding that the stock exchanges more than doubled in size relative to GDP.
"Although the number of micro-finance institutions has nearly doubled, their assets have increased only slightly relative to GDP and remain under 2.0 per cent, but their reach has increased to about 60 per cent of households," the report said.
Stock market growth has been much slower than that of other countries, and average market capitalisation at 6.0 per cent is very low compared to the average of low income countries, which is 55 per cent of GDP. Banks, which are required to list on the stock exchange, constitute the bulk of stock market shares.
Private banks' deposit rates have risen most sharply, while both deposit and lending rates for Nationalised Commercial Banks (NCBs) have dropped significantly.
Deposit rates of private banks average 9.0 per cent compared to 5-6 per cent for foreign banks. In contrast to the situation three years earlier, deposit rates of private banks now significantly exceed rates offered by state banks.
"This may reflect banks' efforts to increase their market share in the context of rising competition and deserves further investigation. As part of their restructuring plans, the NCBs have been subject to limits on their lending to non-public sector entities. This has driven some of their business away to private banks and may explain the decline in their lending and deposit rates since the NCBs lend at below market rates to the public sector," it added.