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Lending rate cut begins due to slump in banking business

  • Published at 09:02 pm September 12th, 2013
Lending rate cut begins due to slump in banking business

The country’s commercial banks have begun reducing their lending rates thanks to excess liquidity in the money market and a central bank move to rationalise the interest rate spread (the difference between the average lending and deposit rates).

Some banks have already reduced their rates on loans and advances this month although this has not yet been announced officially, bankers said. Their announcements will be made in December while other banks are now at the planning stage.

The banks are reducing the lending rate to help increase the banks’ loans and advances while bringing the spread down to within the desired level, they said.

Having a huge amount of idle money accumulated due to poor demand for loans, the commercial banks earlier went for a heavy cut on the deposit rates, pushing up the spread above the desired level of 5%.

This prompted Bangladesh Bank to ask the commercial banks to cut the lending rate, said a senior executive of the central bank who recently expressed concern over banks crossing the threshold, especially Brac Bank and a number of foreign banks.

“The spread increased mainly due to lower deposit rates that came down due to a slump in banks’ business. The lending rates remained unchanged, on the other hand,” said Association of Bankers Bangladesh (ABB) President Nurul Amin.

He said the spread climbed since the beginning of this year. Barring a few exceptions, the average spread is not so alarming, he added. Bangladesh Bank data shows that the average spread was 4.91% in April, 2011 and that this has increased gradually to stand at 5.23% in July.

“Banks are going to cut lending rates individually from this month and might give announcements in December,’’ said the bankers’ president.

The average annual lending rate of the private banks stood at 14.36% and the deposit rate at 9.13% as of July down from the prvious month's rates of 14.44% and 9.1% respectively.

The spread of 26 banks remained above 5% as of July as per the latest Bangladesh Bank data. The spread of foreign banks averaged at 8.64% and among the private commercial banks, Brac bank’s spread was highest at 9.26%.

“The average spread crossed 5% despite the central bank’s directive to bring down the gap to the level below 5%,” Bangladesh Bank Deputy Governor SK Sur Chowdhury said.

To do so, the central bank asked the banks to cut down the lending rate. It already warned 26 banks about crossing the limit.

The interbank call money rate remained stable at a range of between 7% and 7.5%, showing signs of adequate liquidity in the money market.

The call money rate came down to its lowest at 7% in last couple of weeks, and went as high as 8% in the last year. It, however, rose to 9% for just over one week ahead of Eid-ul Fitre.

“Banks should cut the lending rate now as the deposit rate has already been reduced. The lending rates of some banks, however, decreased slightly,” said Bangladesh Bank Chief Economist Hasan Zaman.

“The spread widened because of increasing non-performing loans (NPLs),” said Pubali Bank Managing Director Helal Ahmed Chowdhury. “It would come under control as the banks already started cutting down the lending rate from this month and signs are there that the political turmoil will ease.”

The ratio of NPLs to the total loans for the banking sector, in both gross and net terms, increased at the end of third quarter of FY13 compared to the second quarter, as per BB data.

Gross NPLs went up from 10% at the end of second quarter to 11.9% at the end of the third quarter. The overall banking industry NPL was 2.6% higher at the end of the third quarter of FY13 than the last five years' average of 9.3%.  

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