Banks flout BB’s 4pc cap as lending spread stays sky-high

Bangladesh Bank’s 4 per cent ceiling on banks’ lending-deposit interest-rate spread is being widely breached, with the sector-wide gap still stuck at 5.59 per cent in July�"keeping borrowing costs high and raising fresh questions over banks’ compliance with the central bank’s directive.

The gap, excluding credit card and consumer loans, was only marginally lower than 5.69 per cent in June, leaving banks 1.59 percentage points above the regulatory ceiling.

The stubbornly high spread means banks are continuing to charge borrowers substantially more than they pay depositors, even as Bangladesh Bank seeks to bring down the cost of credit to support business and industrial growth.

The central bank instructed banks in June to keep the average spread within 4 per cent, except for credit card and consumer loans, warning that excessive lending-deposit gaps were hampering economic activity.

Yet the latest data show that the directive has so far failed to produce a meaningful shift in banks’ pricing behaviour.

In July, the banking sector’s average deposit rate was 6.21 per cent against an average lending rate of 11.81 per cent. Excluding credit cards and consumer loans, the average lending rate was 11.80 per cent, resulting in the 5.59 per cent spread monitored by Bangladesh Bank.

The gap was particularly wide among foreign banks, whose average spread stood at 7.98 per cent in July.

The six state-owned commercial banks recorded an average spread of 5.19 per cent, with Sonali Bank at 5.25 per cent and Bangladesh Development Bank at 1.47 per cent.

Private-sector banks posted an average spread of 5.57 per cent, with all but three exceeding the 4 per cent ceiling.

AB Bank reported a spread of 0.33 per cent, while Mutual Trust Bank recorded 3.58 per cent and Meghna Bank exactly 4 per cent.

Specialised banks recorded an average spread of 3.44 per cent, remaining below he limit.

The persistent gap has also triggered a debate over how banks calculate the spread.

Sonali Bank Managing Director Shawkat Ali Khan said banks were using different methods and were working with Bangladesh Bank to establish a uniform methodology.

“Banks are working with the central bank to develop a uniform and acceptable method for calculating the spread for all banks,” he said.

He said Sonali Bank’s spread would be below 4 per cent if calculated under another methodology.

A senior private-bank official said banks currently calculate the spread on a gross basis, based on average deposit and lending rates.

“We have discussed with the central bank the possibility of calculating the spread on a net basis instead of a gross basis,” he said. “If this is introduced, many more banks may fall below the prescribed limit.”

The spread has remained above 5 per cent throughout the year, standing at 5.64 per cent in January, 5.65 per cent in February, 5.72 per cent in March and April, and 5.70 per cent in May before easing in June and July.

A Bangladesh Bank official said changing depositor behaviour was also affecting banks’ pricing.

A section of depositors are shifting funds from one bank to another, with many now placing greater importance on the certainty of getting their money back on time than on the interest rate offered, he said.

As deposit rates fall at some banks, lenders are not reducing lending rates at the same pace, pushing spreads higher.

“This is why Bangladesh Bank has instructed banks to keep their spreads within a maximum of 4 per cent,” the official said.

He said the directive applied to all banks and that discussions had already been held with them.

“Necessary action will be taken against any bank that fails to comply with the directive,” he added.