The spread in the banking sector in the country has been increasing steadily since the introduction of market-based interest rate. In March 2023, the average spread was 2.96 per cent, which now goes up to 5.87 per cent.
Even the spread of some banks has reached 10 per cent despite the central bank's instruction to limit it to 4 per cent, sources said.
The spread refers to the difference between the interest rate banks charge on loans and the interest they pay on deposits.
Generally, a wider interest rate spread does lead to higher profit potential for a bank.
A larger spread means banks earn more from lending activities relative to the cost of borrowing funds from depositors, which translates to increased profitability, according to bankers.
According to sources, the existing average spread in the country's banking sector is the highest in the last decade. In April 2020, the central bank capped the maximum interest rate on bank loans at 9 per cent in response to the demands of businesses. The spread started to decrease immediately.
In March 2020, the average spread in the banking sector stood at 4.07 per cent. Due to the capped interest rate, it came down to 3.05 per cent in the same period the following year. In March 2022, the average spread stood at 3.10 per cent. And in March 2023, the gap between bank loans and deposits decreased further to 2.96 per cent.
Bangladesh Bank (BB) lifted the limit on loan interest rates in July 2023, citing inflation control. Since the maximum interest rate was lifted, loan interest rates have been increasing. At the same time, the spread also started increasing. In just one year, the gap between loan and deposit rates increased from 2.96 to 5.19 per cent. Then, on May 8, 2024, the central bank issued a notification and left the interest rate completely to the market. After this decision, the spread increased to 5.87 per cent in March this year.
Insiders said weak banks are now offering 12-14 per cent interest on deposits but the depositors remain shaky. Instead, they are withdrawing deposits from those banks and shifting their funds to healthy banks at 4-6 per cent interest. As a result, spread of some banks is increasing at an abnormal rate.
They said although the profits of sound banks have increased, the weak ones are losing money. On the other hand good entrepreneurs are defaulting on loans to banks due to high interest rates.
"The central bank is keeping an eye on the abnormal increase in the spread," said BB executive director and spokesperson Arif Hossain Khan, adding, "BB is giving regular guidelines to banks on the spread. It issue notice only if the spread of a bank exceeds 4 per cent. Despite the fact, spread of some banks is increasing."
He also commented that some banks are reaping the benefits of their reputation and some banks are paying the price of their image crisis. Many depositors are withdrawing deposits from some banks even they are offering high rates and placing them in other banks which are in good shape.
According to the latest report published by BB, the average interest rate on deposits of the country's banks in March this year was 6.17 per cent. At the same time, the average interest rate on loans distributed by banks was shown to be 12.04 per cent.
Accordingly, the interest difference or spread stands at 5.87 percent. Of these, foreign banks had the highest spread of 8.95 percent. State-owned commercial banks had the second highest spread of 6.08 percent. And the average spread of 42 private sector banks was 5.60 percent.
Former FBCCI President Mir Nasir Hossain said, "Earlier we got loans from banks at 7-8 per cent interest. But now we are not getting loans even at 14 per cent interest. Now it becomes difficult to conduct business with the increasing interest rates on loans. Even good businessmen are defaulting due to the pressure of high interest rates."
