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Interest rate spread on decline

SIDDIQUE ISLAM | July 20, 2020 00:00:00

Interest rate spread in the country's banking system improved slightly in May as banks slashed interest rates on deposits more than on lending.

The spread defined as the gap between lending and deposit rates rose to 2.94 per cent in May 2020 from 2.92 per cent in the previous month, according to the Bangladesh Bank or BB statistics. The spread was 4.07 per cent in March.

The average rate on deposits fell to 5.24 per cent in May from 5.37 per cent a month earlier, and the interest on lending dropped to 8.18 per cent from 8.29 per cent, the BB data showed.

Senior bankers predicted that the existing trend in spread would continue in the near future because low-cost refinancing funds were available in the banking system.

Some banks have started slashing their interest rate on deposits because of higher inflow of liquidity in the market, they added.

"The interest rate spread may improve further in September if the falling trend in deposit rates continues in the near future," a senior executive of a leading private told the FE on Sunday.

Currently, most of the banks, particularly private lenders, are trying to reduce their borrowing costs by slashing the interest rate on deposits, according to the private banker.

The inflow of liquidity in the market has increased as the central bank has injected fresh funds through buying the US dollar from banks directly, he noted.

The central bank bought around US$550 million from the banks in the first two weeks of this month to keep the inter-bank foreign exchange market stable, according to the central bank statistics.

The average spread with state-owned banks was 2.23 per cent in May 2020, the private banks 2.97 per cent, the foreign banks 5.39 per cent, and the specialised banks 2.03 per cent.

In April 2020, the spread came down to 2.92 per cent from 4.07 per cent in the previous month following the implementation of the single-digit interest rate in the banking sector.

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