Interest rate spread in banks second highest in South Asia
Friday, 7 November 2008
Shakhawat Hossain
The interest rate spread (IRS) in the country's banking sector is second highest in South Asia behind India and Pakistan, according to a Bangladesh Bank report.
"The IRS in the banking sector of major South Asian countries shows that Sri Lanka has the highest spread followed by Bangladesh, Pakistan and India," said the report.
The central bank report is highly significant because it has been prepared against the backdrop of non-cooperation by bankers after its initiative to reduce the spread in the country's banking sector since early this year, said a senior official of Bangladesh Bank.
Spread as measured by the difference between weighted average lending and deposit rates of commercial banks showed that it was 5.76 per cent in Bangladesh, 3.75 per cent to 4.0 per cent in India and 4.82 per cent in Pakistan.
Calculating on the basis of weighted average the BB report said the highest spread of 8.16 per cent has been recorded in Sri Lanka.
The BB official said the report was prepared on the basis of data available until March last with the cash reserve requirement (CRR) at 5.0 per cent for the commercial banks in Bangladesh.
But the CRR was 7.5 per cent in India, 8.0 per cent in Pakistan and 10.0 per cent in Sri Lanka, he said.
The high IRS has resulted from a number of factors including state control of lending, absence of risk management practices, accumulation of bad loans and limited technical skills particularly in the arena of risk management.
The country's banking structure is segmented with state owned commercial banks (SCBs) and private commercial banks (PCBs) holding 35 per cent and 50 per cent of total assets respectively.
The BB report, however, said the spread in the country's banking sector has generally been declining since June 2001 except for a few deviations.
"The spread between lending and deposit rates declined by 0.97 percentage points while deposit and lending rates declined by 1.10 and 0.13 percentage points respectively between June 2001 and March 2008," it said.
This is because of persistent efforts by BB to encourage the banks to reduce IRS to a reasonable level to facilitate investment and growth.
The IRS is widely used as a parameter of bank profitability, intermediation cost and a degree of efficiency of the banking sector. It shows the additional cost of borrowing that banks take to perform intermediation activities between borrowers and fund lenders.
"If the spread is large due to relatively low deposit rates, it would discourage potential savers resulting from low returns on deposits," said the report.
The report added: "On the other hand, if relatively high lending rates prevail, potential borrowers would be discouraged which in turn would reduce investment and hinder growth prospect of the economy."
The interest rate spread (IRS) in the country's banking sector is second highest in South Asia behind India and Pakistan, according to a Bangladesh Bank report.
"The IRS in the banking sector of major South Asian countries shows that Sri Lanka has the highest spread followed by Bangladesh, Pakistan and India," said the report.
The central bank report is highly significant because it has been prepared against the backdrop of non-cooperation by bankers after its initiative to reduce the spread in the country's banking sector since early this year, said a senior official of Bangladesh Bank.
Spread as measured by the difference between weighted average lending and deposit rates of commercial banks showed that it was 5.76 per cent in Bangladesh, 3.75 per cent to 4.0 per cent in India and 4.82 per cent in Pakistan.
Calculating on the basis of weighted average the BB report said the highest spread of 8.16 per cent has been recorded in Sri Lanka.
The BB official said the report was prepared on the basis of data available until March last with the cash reserve requirement (CRR) at 5.0 per cent for the commercial banks in Bangladesh.
But the CRR was 7.5 per cent in India, 8.0 per cent in Pakistan and 10.0 per cent in Sri Lanka, he said.
The high IRS has resulted from a number of factors including state control of lending, absence of risk management practices, accumulation of bad loans and limited technical skills particularly in the arena of risk management.
The country's banking structure is segmented with state owned commercial banks (SCBs) and private commercial banks (PCBs) holding 35 per cent and 50 per cent of total assets respectively.
The BB report, however, said the spread in the country's banking sector has generally been declining since June 2001 except for a few deviations.
"The spread between lending and deposit rates declined by 0.97 percentage points while deposit and lending rates declined by 1.10 and 0.13 percentage points respectively between June 2001 and March 2008," it said.
This is because of persistent efforts by BB to encourage the banks to reduce IRS to a reasonable level to facilitate investment and growth.
The IRS is widely used as a parameter of bank profitability, intermediation cost and a degree of efficiency of the banking sector. It shows the additional cost of borrowing that banks take to perform intermediation activities between borrowers and fund lenders.
"If the spread is large due to relatively low deposit rates, it would discourage potential savers resulting from low returns on deposits," said the report.
The report added: "On the other hand, if relatively high lending rates prevail, potential borrowers would be discouraged which in turn would reduce investment and hinder growth prospect of the economy."