Interest rate spread fell 0.48 percentage point in the first 11 months of last fiscal year and dipped below 5 percent — a trend which the government says will help attract investment. Spread — the difference between banks’ lending and deposit rates — was 4.83 percent in May this year, down from 5.31 percent in June last year. Finance Minister AMA Muhith in his budget speech last month said spread is shrinking gradually due to banking sector reforms. The minister also said the positive impact of the decrease in spread has already been felt in investment. “This gap should be narrowed to 4 percent within two years,” he said, adding that steps have been taken to encourage credit flow to productive sectors. As of March 2015, private sector credit growth was 13.6 percent on an annual basis. If foreign borrowings are taken into account, private sector credit growth would be around 16 percent, Muhith said. Businesses have long been complaining that spread is wider due to higher lending rates. Though there are no particular rules about what the spread should be, Bangladesh Bank encourages banks to keep it below 5 percent. Despite a fall in the overall spread, 22 banks, out the 56 in the country, had their spread above 5 percent, while some had as high as 7-10 percent. Some banks’ spread is high as their deposit rates are excessively low compared to lending rates. Cost of fund is higher at some banks that disburse more micro and SME credit, as these loans need to be monitored continuously, leading to a rise in their lending rates and spread. Also, spread is higher at some poorly-performing banks that have large amounts of classified loans. Spread at state-owned commercial banks, which account for 20.88 percent of the total credit in the banking sector, was 3.55 percent in May, according to central bank statistics. The average deposit rate of these banks was 6.93 percent, while the average interest rate on credit was 10.48 percent. Spread at specialised banks was only 1.51 percent, with their average deposit rate being 8.17 percent and lending rate 9.68 percent. Their share in the total loans is 4 percent. Whether the spread will play a positive role in raising investment depends on the lending rates of the private banks as their share in the total banking credit is the highest — almost 71 percent. Private banks’ overall spread was 5.11 percent — the average deposit rate 7.25 percent and lending rate 12.36 percent. Foreign banks’ spread was the highest at 7.91 percent, with their average deposit rate being 3.21 percent and lending rate 11.12 percent, though their share in total loans is only 4.31 percent. Of all banks, Standard Chartered, which accounts for 2.12 percent of the total loans in the banking system, had the widest spread at 10.03 percent. Its interest on deposit was 2.51 percent on average against the lending rate at 12.54 percent. “Our lending rates are the lowest in the market. However, our spread is a function of our balance sheet efficiency which has been built over a century in the country,” said Abrar A Anwar, chief executive officer of Standard Chartered Bangladesh. “It means we optimise our assets and liabilities through efficient management. That’s why our cost of fund is lower than other banks,” he said by phone. Brac Bank had the second widest spread at 9.9 percent — lending rate 14.79 percent and deposit rate 4.89 percent — mainly due to its huge micro and SME loans that raise costs. The average lending rate in the banking sector was 11.82 percent and deposit rate 6.99 percent.
