Dhaka, Bangladesh (BBN) – The weighted average spread between lending and deposit rates of commercial banks declined to 5.34 per cent in June following the central bank’s dogged persuasion to bring down the same to 5.0 per cent.

“We expect the spread to decline further during July-September period,” an executive of the Bangladesh Bank (BB), the country’s central bank, told BBN in Dhaka.

He also said most of the commercial banks revised their interest rates on both deposit and lending during the period under review.

At least seven commercial banks increased the interest rates on deposits in September to encourage the people to keep their money in the banks.

The banks have raised the interest rates on deposit by 0.25 to 3.0 percentage points to mobilize fresh funds from general depositors.

On the other hand, at least four banks have reduced the interest rates on lending this month in line with the advice from the Bangladesh Association of Banks (BAB) to the central bank.

On March 3, 2008, the BAB assured the central bank that its members would reduce interest rates on industrial term loans to 14.75 per cent from the existing 16 per cent while the same for the productive sectors to 14.50 per cent from existing 15.50 per cent.

“The central bank wants that the banks to reduce the interest rate spread to 5.0 per cent by enhancing their efficiency level,” the BB executive noted.

However, Chairman of the Association of Bankers, Bangladesh (ABB) Mahmood Sattar told the Financial Express (FE), the country’s lone financial daily that the existing downward trend in the interest rate spread would be difficult to continue if the central bank raised the percentage of cash reserve requirement (CCR), bank rate and interest rates on government approved bonds.

The ABB expects that the interest rate spread of the PCBs would come down to below 5.0 per cent by the end July-September quarter of the calendar year, he added.

The weighted average spread between lending and deposit rates in the country’s banking sector came down to 5.34 per cent as on June 30, 2008 from 5.75 per cent of March last, according to the central bank statistics.

Besides, the weighted average rates on lending stood at 12.29 per cent in June last while the interest rates on deposit were paid at 6.95 per cent by the banks, the BB’s data showed.

The spread being maintained by at least 21 commercial banks out of 48 are still between over 5.0 and 11.29 per cent, while the average spread of the state-owned four commercial banks, private commercial banks (PCBs), foreign commercial banks (FCBs), specialized banks (SBs) is 4.48 per cent, 5.09 per cent, 8.54 per cent and 3.20 per cent respectively.

The country’s business community earlier urged the governor of the central bank for taking initiatives to reduce lending rates to facilitate business activities, particularly for industrialization in Bangladesh.

Bankers and experts, however, said the real interest rate in the country is still low and, to some extent, negative because of high inflation rate that was 10.04 cent in June last. As a result, the banks are raising the interest rates on deposit to attract more funds from their clients.

The country’s consumer price index (CPI) inflation reached 10.82 per cent on the point-to-point basis in July from 10.04 per cent in June 2008.

BBN/SI/SI/AD-28September08-1:58PM (BST)