Interest rate spread drops slightly in October

Overall interest rate spread in the country's banking sector fell slightly in October as the commercial banks slashed their interest rates more on lending than that of deposits, officials said.
The weighted average spread between lending and deposit rates offered by the commercial banks came down to 4.50 per cent in October 2017 from 4.55 per cent in the previous month, according to the central bank's latest statistics released on Monday.
The spread was 4.70 per cent in October 2016.
The central bank is now working to keep the spread within 4.0 per cent in the near future, according to officials.
The issue was discussed at the board of directors meeting of the Bangladesh Bank held at its headquarters in Dhaka on Monday with BB governor Fazle Kabir in the chair.
"We've informed our board about the latest trend in the spread," SK Sur Chowdhury, deputy governor of the BB, told the FE after the meeting without elaborating.
The BB officials, however, said the banks have already been advised to reduce their interest rate spread through improving their efficiency as well as profitability instead of slashing interest rates on deposits.
"The banks will have to reduce the amounts of non-performing loans (NPLs) immediately for improving their overall financial health," a BB senior official said while explaining how to increase profitability of the banks.
Meanwhile, the amount of classified loans in the country's banking sector jumped by more than 29 per cent or Tk 181.35 billion in the first nine months of the current calendar year despite close monitoring by the BB.
The volume of NPLs rose to Tk 803.07 billion as of September 30 last from Tk 621.72 billion as of December 2016. It was Tk 657.31 billion a year ago.
Senior bankers, however, said there is a twin-effect of classified loans on the banking system.
The banks will have to keep the interest earned from classified loans to their interest-suspense account, instead of taking it into profit account, they explained.
Besides, the banks will have to ensure required provisioning against total classified loans from their profits, they added.
"The lower volume of NPLs will definitely help reduce the spread in the near future," Syed Mahbubur Rahman, managing director and chief executive officer (CEO) of Dhaka Bank Limited, told the FE.
He also sought legal support from the authorities concerned to reduce the amount of classified loans. "The banks need to adopt action-oriented policies to curb the rising trend in NPLs," the senior banker noted.
The weighted average rates on deposits came down to 4.89 per cent in October last from 4.90 per cent in the previous month while interest on lending dropped to 9.39 per cent from 9.45 per cent, the BB data showed.
The spread being maintained by at least nine commercial banks out of 57 still remains high. It ranges between more than 5.0 per cent and 8.45 per cent.
Average spread with state-owned commercial banks (SoCBs) was 3.85 per cent, private commercial banks (PCBs) 4.48 per cent, foreign commercial banks (FCBs) 6.39 per cent and specialised banks (SBs) 2.82 per cent in October 2017.
Excluding consumer finance and credit card, the spread of all banks also came down to 4.40 per cent in October 2017 from 4.45 per cent a month ago.
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