The central bank asked all the scheduled banks not to fix interest rate on term deposits below the annual average inflation rate to protect depositors' interests, as they count small returns, officials said.
Under the new provisions, the banks have to fix interest rates on term deposit with maturity of three months and above at rate not less than the rate of inflation, which was published three months before, according to a notification issued by the Bangladesh Bank (BB) Sunday.
Inflation as measured by consumers' price index (CPI) overshot the government-set target in the just-concluded fiscal year (FY), 2020-21, because of higher food prices along with price rises of other essentials on the global market.
The average inflation rose to 5.56 per cent in FY'21 while the government had set the rate at 5.40 per cent, according to Bangladesh Bureau of Statistics (BBS)'s latest data. It was 5.65 per cent in FY'20.
The 12-month average inflation was 5.59 per cent in May 2021.
"We've taken the latest moves considering the interest of individuals, provident and gratuity fund holders," a senior BB official told the FE while explaining the main objective of the notification.
Terming the BB latest moves a positive one, experts, however, said such initiative could have been taken at a time when the central bank put a cap on lending at maximum 9.0 per cent.
"Of late, it's a good imitative. Still there remains a challenge in its proper implementation," Salehuddin Ahmed, former governor of the BB, told the FE while replying to a query.
Dr. Ahmed also said the banks may be unwilling to implement the latest BB directive on deposit rates as they have excess liquidity.
Banks' surplus liquidity, hitting an all-time high at Tk 2,315 billion as of June 30 this calendar year, is fuelled by lower private-credit growth in a sign that investment situation has cooled.
Bankers, however, feared that the profitability of banks might be hit in the near future following BB's latest moves on deposit-rate appreciation.
"A portion of savings deposit may move into fixed or term deposit. As a result, cost of deposit will go up," Syed Mahbubur Rahman, managing director (MD) and chief executive officer (CEO) of Mutual Trust Bank Limited, explained.
The latest BB move came against the backdrop of faster decline in deposit rates than the lending rates in the recent months.
The weighted average rates on deposit came down to 4.13 per cent in June 2021 from 5.06 per cent a year before. It was paid at 5.43 per cent by the banks in June 2019.
Talking to the FE, another BB senior official said the falling trend in the interest rates on deposits has affected people's savings habit, prompting them to spend on wasteful consumption and unproductive sectors.
He also apprehends it may encourage the flow of funds into less-productive and-risky sectors and wane their purchasing power.
"It may create difficulties to manage funds by the banks if the existing trend continues," the central banker admitted.
Most banks have already slashed their interest rates on all types of deposits because of the higher inflow of liquidity to the market, affecting the savers, particularly small ones seriously, according to the senior bankers.
On the other hand, the weighted average rates on lending came down to 7.33 per cent in June 2021 from 7.95 per cent in the same period of the previous calendar year. It was 9.58 per cent in June 2019.
The interest-rate spread widened in June last as the banks cut the deposit rates deeper than the lending rates, according to the central bank's latest statistics.
The weighted average spread between the lending and deposit rates rose to 3.20 per cent in June 2021 from 2.89 per cent a year ago. It was 4.15 per cent in June 2019.
The spread may fall in the coming months following fixation of the interest rates on term deposit by the central bank, they added.
The average spread for the state-owned commercial banks (SoCBs) was 2.18 per cent in June.
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