Interest spread calculation to be part of CAMELS

Interest-rate spread of banks will be made a part of the supervisory mechanism called CAMELS rating, officials said.
The revised calculation method for CAMELS rating will come into effect in December next and any breach of limit set in relation to interest spread will be construed as noncompliance with the central bank rules.   
Under the proposed revision of the CAMELS calculation method, banks having above 5.0 per cent spread between rates of interest on public deposits and banks' loans will have to bring it down under 5.0 per cent.
Otherwise, noncompliance with the regulations of the Bangladesh Bank will be reflected in their CAMELS rating.
"We're now working on the issue," a senior official of the central bank told the FE Tuesday.
CAMELS (Capital, Assets, Management, Earnings, Liquidity and Sensitivity to market risk) rating is a supervisory tool to identify those banking companies which have problems and require increased oversights.
The central bank has already formed a nine-member high-powered committee, headed by its deputy governor Abu Hena Mohammad Razee Hassan, to remake the guidelines for CAMELS rating.
Another Deputy Governor of the BB, SK Sur Chowdhury, is also assisting the committee as an adviser, according to the BB official.
"The central bank wants that all banks keep the spread blow 5.0 per cent through improving their efficiency as well as profitability both instead of slashing interest rates on deposit," the official explained -- in an implicit reference to deep cuts in deposit rates in recent times.
The BB will provide policy support to the banks for maintaining the spread below 5.0 per cent from the existing levels, the central banker hinted.
Under the existing system, any bank marginal or unsatisfactory under composite CAMELS rating is generally identified as a problem bank.
Activities of these banks are closely monitored by the central bank.
Two private commercial banks (PCBs) have been categorised as 'problem bank', asking them to submit special reports on quarterly basis for a review of their real financial position.
The problem banks have to follow specific guidelines in addition to normal banking rules and regulations to improve upon its financial health, according to the existing provisions.
Besides, the BB had introduced Early Warning System (EWS) of supervision in March 2005 to address the difficulties facing the banks in any of the areas of CAMELS.
Any bank found facing difficulty in any areas of operations is brought under Early Warning category and monitored very closely to help improve its performance.
Currently, there is now bank under EWS.
Meanwhile, the weighted average spread between lending and deposit rates offered by the commercial banks came down to 4.80 per cent in August last from 4.84 per cent in July 2016.
The overall spread in the country's banking sector decreased slightly during the period under review as the commercial banks slashed interests on deposits far more than on lending.
The weighted average rates on deposits came down to 5.44 per cent in August from 5.48 per cent in the previous month while interest rates on loans dropped to 10.32 per cent from 10.48 per cent.
The spread being maintained by at least 19 commercial banks out of 56 still ranges as high as between more than 5.0 per cent and 9.47 per cent, according to the central bank statistics.
Average spread with the six state-owned commercial banks (SoCBs) is 4.05 per cent, private commercial banks (PCBs) 4.91 per cent, foreign commercial banks (FCBs) 6.73 per cent and specialised banks (SBs) 2.42 per cent.
After excluding consumer finance and credit card, the spread of all banks stood at 4.60 per cent in August 2016 from 4.69 per cent a month ago, the BB data showed.
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