Bank interest spread widens

Overall interest-rate spread in the country's banking sector widened further in May as commercial banks cut interests on deposits deeper than that on lending.
The weighted average spread between lending and deposit rates offered by the commercial banks rose to 4.90 per cent in May 2016 from 4.87 per cent in the previous month, according to the central bank's latest statistics.
The spread was 4.86 per cent in March 2016.
On the other hand, the weighted average rates on deposits came down to 5.67 per cent in May from 5.77 per cent in the previous month while interest rates on lending dropped to 10.57 per cent from 10. 64 per cent.
The upward trend in interest rate spread may continue until June for higher credit growth particularly in the private sector, according to the bankers.
"There was maximum use of excess liquidity by the banks through offering credits to the private sector instead of overnight call money market as well as the government-approved securities," a senior official of a leading private commercial bank told the FE.
The interest situation may reverse from the month of July as the government is set to raise borrowing from the banking system significantly to adjust higher expenditure in June as well as partly to finance its budget deficit for the current fiscal year (FY) 2016-17, the private banker observed.
The government may borrow Tk 123.50 billion from the banking system by issuing treasury bills (T-bills) and bonds in the month of July, according to the auction calendar.
"The yield rates on the government-approved securities have already started rising recently because of higher borrowing by the government from the banking sector," he explained.
He said such uptrend in yield rates on the government securities may continue in the near future.
On the other hand, the volume of excess liquidity decreased recently as the overall bank credit increased, a senior official of the Bangladesh Bank (BB) told the FE.
He also said the overall excess liquidity with the commercial banks came down to Tk 1.14 trillion as of May 26 last from Tk 1.23 trillion two months ago.
"But major portion of the funds has been invested in the risk-free government securities," the central banker explained.
He also expects that such declining trend in excess liquidity may continue in the coming months.
The spread being maintained by at least 23 commercial banks out of 56 still ranges between more than 5.0 per cent and 9.48 per cent.
Average spread with the six state-owned commercial banks (SoCBs) is 4.13 per cent, private commercial banks (PCBs) 5.05 per cent, foreign commercial banks (FCBs) 7.00 per cent and specialised banks (SBs) 1.89 per cent.
The central bank has already advised the banks to reduce the interest-rate spread with improvement in their efficiency, not only by reducing the interest rates on deposits, another BB official said.
He also said: "We're still working to bring the spread down to nearly 4.0 per cent shortly from the existing level."
The commercial banks have been advised to bring down spread through reducing their volume of classified loans, the central banker said.
"The banks may offer lower interest rates on lending if they can cut the volume of their non-performing loans (NPLs)," he noted.
    [email protected]