Banks bag windfalls from wide interest spread

Lending-matrix SMART comes as boon for bankers as banks bag windfalls from wide spread between the rates of interest they provide to depositors and take from borrowers.
A significant rise in gains from the differences between the two rates was recorded in July as spinoffs from the regulatory reference rate styled SMART.
Officials and bankers have said the central bank's monetary-policy shift from monetary targeting to interest-rate targeting pays off for the country's commercial banks which saw the greatest spread in 40 months to July last, officials and bankers said.
Such leap between the difference of weighted average deposit and lending rates -- encoded as spread in banking parlance -- gives some sorts of respite to the banks which had witnessed their core incomes squeezing since the imposition of the lending cap of 9.0 per cent on April in 2020, according to the sector-insiders.
According to data with Bangladesh Bank (BB), the central bank, the weighted average spread rose to 3.29 per cent in July, up by 36 basis points from June's 2.93 per cent.
The official data showed the July spread figure as the highest since March in 2020 when it was 4.07 per cent. In the first five months of this year, the average spread for banks counted 2.95 per cent, 2.96 per cent, 2.96 per cent, 2.91 per cent and 2.91 per cent in January, February, March, April and May respectively.
On July 2023, the central bank as part of its shift in monetary-policy stance to interest-rate-targeting mechanism introduced a market-based reference rate called SMART (Six-Month Moving Average Rate of Treasury Bill) rate through which the banks are allowed to fix their lending rate by adding up maximum 3.0 percentage points to the benchmark rate.
With the implementation of the newly benchmark rate-driven interest regime on the money market, the controversial lending cap of 9.0 per cent was uncapped and banks were allowed to charge maximum 10.10 per cent as the SMART rate, which is now 7.10 per cent.
Seeking anonymity, a BB official says the average spread enjoyed by banks in July went up significantly thanks to the SMART. It means the transmission in the central bank's monetary policy shift started working well, which is a "good sign".
But the central banker questions rationality of aligning deposit and lending rates with the SMART regime. "Look at the average deposit rate -- it rose by only 8 basis points while the lending rate got enhanced by 44 basis points. Is it rational?" the official poised the question.
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 scenario of spread.
The top executive of the bank finds the deposit rate continuously increasing in the banking sector. There are few banks which start offering depositors as high as 9.0 per cent.
"So we need to see the spread data in the coming month to understand the situation as we cannot raise the lending rate in six months," he adds.
Managing director and chief executive officer of Dutch Bangla Bank Limited (DBBL) Abul Kashem Md. Shirin observes that the rate of deposit in banks started rising slowly as liquidity tightness still persists in the banking system.
"The banks having liquidity dearth require credits to improve their balance sheet and they have been offering higher rates to allure the depositors," he says.
"It means, the spread would come down in coming months because banks which once revised the lending rate will not be allowed to raise it in six months while the deposit rate will be increasing slowly," the banker adds.

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