Banks bag windfall from record interest spread

Interest calculating in SMART formula comes as a boon for banking as banks bag windfalls from a record spread between the rates they provide to depositors and take from borrowers.
Officials and bankers have said Bangladesh Bank's monetary-policy shift from monetary targeting to interest-rate targeting pays off for the country's commercial banks as they saw the widest spread in over nine years to March last.
Such leap between the difference of weighted average deposit and lending rates - called spread in banking parlance - gives some sort of respite to the banks which had witnessed their core incomes squeezing since the imposition of 9.0-percent lending cap in April 2020, according to sector-insiders.
According to data with the central bank, the weighted average spread rose to 5.11 per cent in March, up by 7 basis points from February's 5.04 per cent.
The official data showed the March spread figure as the highest probably since November 2014 when it was 5.12 per cent.
Seeking anonymity, a BB official said the spread started rising in July 2023 when the central bank introduced interest rate-related benchmark rate called SMART.
Now it rose to 5.11 per cent in March last as weighted average rates of deposits and lending were 5.20 per cent and 10.31 per cent respectively, according to the official.
The difference between lending and deposit rates was only 2.93 per cent in June last year before the SMART came into effect on the money market. Afterwards, it started increasing with the figure rising to 3.29 per cent, 3.33 per cent, 3.31 per cent, 3.34 per cent, 3.35 per cent, 4.66 per cent and 4.83 per cent in July, August, September, October, November and December in 2023 and January in 2024 respectively.
Managing director and chief executive officer of Mutual Trust Bank (MTB) Limited Syed Mahbubur Rahman says the banks have raised both deposit and lending rates in line with SMART rating paradigm, which is reflected in the spread situation.
Managing director and chief executive officer of Dhaka Bank Emranul Huq observes that the lending rate in banks keeps rising quickly because of significant increase in SMART rate every month since its introduction.
The deposit rate offered by the banks is also rising but the depositors get the gains once the tenure matures. On the other hand, the banks can charge increased rate from the fresh borrowers each month.
"That's why the spread is widening fast," the experienced banker says about the interest arithmetic.
Seeking anonymity, a top executive of a private bank said getting formal credits becomes extremely expensive, which is lessening the fund demands on the market.
On the other hand, there are banks having liquidity dearth in the existing contractionary monetary regime and they require credits to improve their balance sheet and offer higher rates to allure the depositors, he said.
"It means the difference between the weighted average rates of deposit and lending would come down in the coming few months," the banker hopes.

[email protected]