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Bank squeeze depositors in hunt for profit

  • Published at 12:43 am November 15th, 2020
Interest rate spread Oct 19 to Sept 20

Interest rate spread widening since July

The interest rate spread, which is the difference between the interest rate a bank pays to depositors and the interest rate it receives from loans to consumers, has started to widen again as banks awash with funds have started to slash rates on their deposit products.

At the end of September, the spread, which is a key determinant of a financial institution’s profitability or lack thereof,stood at 3 per cent after hitting a 12-month-low in July, according to the data from the Bangladesh Bank (BB). A year earlier, it was 3.91 per cent.

The lack of demand for funds for the ongoing economic downturn from the global coronavirus pandemic and the expansionary monetary policy announced by the central bank in July with the hope of bringing about an economic bounce.

As part of its move to make funds cheaper for banks, the BB had slashed the repurchase agreement (repo) rate -- which is the rate that is used to signal the central bank’s monetary policy stance -- by 50 basis points to 4.75 per cent.

The central bank also cut the reverse repo rate by 75 basis points to 4 per cent and the bank rate by 100 basis points to 4 per cent.

A reverse repo agreement is the purchase of securities with the agreement to sell them at a higher price at a specific date in future. In Bangladesh, banks deposit their money with the central bank at a rate set by the latter.

The bank rate, which is another major tool of the central bank, was cut after 17 years as part of the expansionary monetary policy. The BB, on the whole, uses the rate while giving out money to banks under its refinance scheme.  

Earlier in March, the central bank had cut the cash reserve ratio and credit-deposit ratio to prevent the economy from crashlanding for the countrywide shutdown enforced by the government to flatten the curve on coronavirus between March 26 and May 30.

Besides, the BB is also injecting funds to the financial sector by way of implementing the stimulus packages.

But the demand for funds is just not there: private sector credit growth has been hovering around the 9 per cent-mark since July against the central bank’s target of 14.8 per cent.

Banks though need to turn in a profit, and they primarily do so by managing the spread between the interest rate on deposits that they pay to consumers and the rate they receive from their loans. 

In other words, when the interest that a bank earns from loans is greater than the interest it pays on deposits, it generates income from the interest rate spread. In simple terms, net interest rates spreads are like profit margins.

The greater the spread, the more profitable the financial institution is likely to be. 

So in the absence of demand for funds, banks have turned to slashing the rates on deposits to improve their spread, according to Abdul Halim Chowdhury, managing director of Pubali Bank. 

As a result, the interest rate spread has slightly widened in September, he said.

In September, the banking sector’s weighted average deposit stood at 4.79 per cent, down from 4.95 per cent in the previous month.

Pubali’s weighted average deposit rate stood at 4.6 per cent in September, down from 4.64 per cent in August. 

Most of the banks have slashed their deposits rates to 5 per cent and below, which is less than the government-instructed 6 per cent, as there is no liquidity pressure in the market, according to Chowdhury, who has been at the helm of Pubali Bank since 2015.

“Banks are sitting on excess liquidity.”

At the end of August, surplus liquidity in the banking sector stood at Tk 160,978 crore, up from Tk 140,730 crore in July, according to data from the BB. September’s figure is not out yet.

“Our interest income has fallen drastically due to the interest rate cap on lending. So, the interest rate spread should have to improve further. Otherwise, it is not possible for us to survive,” Chowdhury added. 

From April, the BB has imposed an interest rate cap of 9 per cent on all loan products excluding credit cards, which took banks’ spread to less than 3 per cent. 

“The interest rate spread has improved a bit because banks are gradually lowering the rates of interest on deposits products,” said Syed Mahbubur Rahman, MD of Mutual Trust Bank, whose weighted average deposit rate stood at 5.29 per cent in September, down from 5.40 per cent in August. 

At the end of September, the average interest rate spread of state-owned banks stood at 2.09 per cent. It was 3.01 per cent for private banks, 6.15 per centfor foreign banks and 1.99 per cent for specialised banks.

However, the interest rate spread might narrow soon.

“Some ‘good borrowers’ are asking for 8 per cent interest on their fresh loans,” said Rahman, also the former chairman of the Association of Bankers, Bangladesh, a platform of banks’ MDs.

Dhaka Bank MD Emranul Huq echoed the same as Rahman and Chowdhury.

“We are collecting all kinds of deposits at 4 to 5 per cent interest. Before, we those products had higher rates on them. This helped us improve our spread.”

Dhaka Bank’s weighted average deposit rate stood at 5.61 per cent in September, down from 5.68 per cent in the previous month.

The reasons for the banks’ surplus liquidity are the lower trend of import payments and the surge in remittance inflows, Huq added.

Between July and October, expatriate Bangladeshis sent home $8.9 billion, up 45.9 per cent year-on-year.

Import payments amounting to $11.7 billion were made between July and September, down about 12 per cent from a year earlier, according to data from the BB.

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