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Bangladesh Bank’s instruction to bring down the interest rate spread to 4 percentage points in banks has remained largely ignored due to rising bad loans in the country’s banking system.


Besides, banks’ reluctance to cut the interest rate spread in fear of profit fall was another reason for their non-compliance with the BB directive, central bank officials said.
Interest rate spread is the difference between borrowing interest rate and lending interest rate.
In March last year, the central bank asked all the scheduled banks to bring down interest rate spread to 4 percentage points from 5 percentage points.
BB took the move following an initiative of the government high ups to contain lending rate within 9 per cent and the deposit rate within 6 per cent in banks with the aim of boosting investments in the private sector.
As per the BB data as of December 31 last year, the interest rate spread of 32 out of 57 scheduled banks were above the BB-set limit (4 percentage points).
The number of banks having the interest rate spread above 4 percentage points was 36 in May last year when the BB issued the directive.
Out of the 34 foreign and local private banks, the interest rate spread of 15 banks was even above 5 percentage points.
BB officials said in March last year, the interest rate spread of 11 banks had exceeded the BB-allowed limit of 5 percentage points, which indicated that the situation deteriorated in several banks.
Officials of a number of banks said that the situation remained unchanged due mainly to rising bad loans as such loans increased cost burden for the banks.
Unless bad loans are contained, it would not be possible for the banks to reduce the interest rate spread as they are supposed to adjust bad loans-generated cost by imposing high interest rate on lending.
The BB data also showed that the interest rate spread of a number of banks was hovering at 7-8 percentage points.
As of September 30, 2018, the amount of bad loans in the country’s banking system stood at Tk 99,370 crore, 11.48 per cent of the total outstanding loans (Tk 8,65,930 crore) in the country’s banking system.
If Tk 48,053 crore in write-offs were taken into consideration, the total amount of defaulted loans would be Tk 1,47,423 crore.
Of the 15 banks, the interest rate spread (excluding the interest rate on consumer finance and credit card) was the highest 7.71 percentage points in Standard Chartered Bank and the second highest in Dutch-Bangla Bank (7.85 percentage points).
The spread was 7.25 percentage points in BRAC Bank, 7 percentage points in Citi Bank NA, 6.74 percentage points in Woori Bank and 6.07 percentage points in HSBC.
The average spread in the foreign commercial banks was 6.22 per cent while the rate was 4.42 per cent in the private commercial banks.
The average interest rate spread in the state-owned banks and specialised banks was 2.22 per cent and 1.85 per cent respectively.

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