10 banks face show-cause for low deposit rates

Bangladesh Bank has asked 10 banks to explain why they maintained a high interest rate spread for long depriving depositors.

The spread, the gap between lending and deposit rates, was high ignoring the BB rules, which is why the central bank sent letters to them on August 10 seeking an explanation, said a BB official.

They have been asked to reply in seven working days.

The 10 are Dutch-Bangla Bank, Shimanto Bank, Brac Bank, Standard Chartered Bangladesh, State Bank of India, Woori Bank, The City Bank, Prime Bank, Eastern Bank and Trust Bank.

Maintaining a high interest rate spread means the banks gave out loans at a high interest rate while providing a low rate to their depositors.

As per the central bank rules, banks have to keep their spread either at or less than four percentage points.

But the banks maintained spreads of more than 4.50 percentage points, breaching the central bank policy, in order to make high profits.

A BB official said the central bank would take punitive measures if the banks continued to breach the policy. 

"Depositors are now deprived of getting their required returns due to the high spread adopted by the banks," according to a BB paper.

The central bank also asked the lenders to explain why they did not reduce the spread as per the central bank rules.

Among the 10, the spread of Dutch-Bangla Bank was the highest in June, with its weighted average deposit rate being 1.66 per cent against a lending rate of 7.80 per cent.

The spread of the bank stood at 6.14 percentage points.

Managing Director Abul Kashem Md Shirin told The Daily Star that the central bank should calculate operating expenses of a bank when calculating the spread.

"My bank's operating expenses is too much high as we are hugely involved in widening the digital financial inclusions," he said.

For instance, the bank's digital infrastructure is larger than that in any other bank, putting an impact on the spread, he said, adding that the BB should consider the issue.

Selim RF Hussain, managing director of Brac Bank, said the high spread in his bank would go down in the quickest possible time as the lender had already revised the interest rate on deposits on August 9 complying with the BB instruction.

The spread in the bank stood at 5.40 percentage points.

On August 8, the BB asked banks not to set interest rates on fixed term deposits below the inflation rate as it yields negative returns for savers.

The weighted average interest rate on deposits stood at 4.13 per cent in June while the average inflation rate was 5.56 per cent.

The BB took the move as most banks had offered an interest rate of 2 per cent to 4 per cent on fixed deposit receipts (FDRs), which result in a negative real interest rate of 2 per cent to 3 per cent for savers.

The overall spread in the banking sector, however, stood at 3.09 percentage points in June as the weighted average rate on lending was 7.22 per cent.

This means the majority of lenders have followed the central bank's rules accurately.

Ali Reza Iftekhar, managing director of Eastern Bank, said they had earlier been forced to release high-cost deposits due to the business slowdown, after which it had reduced the interest rate on various deposit products.

"But, the spread will decrease within a month as it has already raised the deposit rate following the central bank's instruction," he said.

The spread in the bank was 4.52 percentage points in June.

Hassan O Rashid, managing director of Prime Bank, said the interest rate on loans and deposits were driven by market forces and competition.

"We here offer the most competitive rate on both loans and deposits to our valued customers and the spread is an outcome of our efficiency, brand value and balance sheet management," he said.

The spread ultimately allows us to strengthen the bank by building up provisions for non-performing loans, which is a big challenge for the banking industry, Rashid said.

"We respect Bangladesh Bank guidelines and are in discussion with them in this regard," he said.

According to a statement of Standard Chartered Bangladesh, the reported spread of 5.35 percentage points is based on deposits and assets on the domestic banking unit only.

Being an international bank in Bangladesh, the lender remains at the forefront of driving exports and inward capital flows, which leads to substantial transactional foreign currency deposits in domestic banking units, it said.

"However, corresponding foreign currency loans against these deposits are booked in the offshore banking unit," it said.

Therefore, the combined spread for offshore and domestic banking units is much lower than the reported spread. The combined spread is around 4 percentage points as on June this year, the statement said.

Managing directors of Trust Bank and Shimanto Bank did not immediately respond to a request for comment while the State Bank of India, Woori Bank and The City Bank did not respond.