BB won’t budge on deposit rate order

The Bangladesh Bank yesterday refused to revisit its instruction that asked banks to set a higher interest rate on fixed deposits than the inflation rate despite pleas from lenders.

Banks placed the demand at a meeting chaired by BB Governor Fazle Kabir. Managing directors of all lenders were present.

The meeting between lenders and the central bank is usually held every three months to discuss the contemporary issues of the banking sector.

After the meeting, five managing directors told The Daily Star that they had made all-out efforts to change the central bank’s stance, but it won’t budge.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said the central bank had heard all points raised by banks.

“The banking regulator also responded to the points. But it asked us to follow the latest notice on the issue,” he said.

The BB on August 8 asked banks not to fix interest rates on fixed-term deposits below the inflation rate in order to protect depositors from negative returns.

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, showed data from the central bank and the Bangladesh Bureau of Statistics.

As a result, depositors are getting a negative return, which is discouraging people from parking their funds with banks.

“The latest decision will create a haphazard situation in the banking sector as the interest rate on the lending is declining. Now, the rate on deposits will go up,” said one managing director.

In general, both deposit and lending rates maintain an upward or downward trend in tandem.

“But it will not happen this time. As a result, this will create an abnormal situation in the financial sector,” the managing director said.

“Although the weighted average rate on loans stood at 7.33 per cent in July, it is not the real picture,” said Mirza Elias Uddin Ahmed, managing director of Jamuna Bank.

Banks have to keep a portion of deposits in the central bank in the form of statutory liquidity ratio (SLR) and cash reserve ratio (CRR).

The interest rate on the government securities purchased by banks to retain the mandatory SLR ratio is very low. At the same time, there is no return on the investment aimed at maintaining the CRR, Ahmed said.

In addition, there are administrative costs to maintain deposits, he said. “So, the cost of fund is higher than the weighted average on deposits.”

Against the backdrop, the deposit rate may go higher than the lending rate, he said.

“If banks post a lower profit, this will give a negative signal to the outside world about our financial sector.”

Another CEO said the capital and provisioning base at some banks were not strong. “So, the instruction will create a problem for them.”

The lower deposit rate is the outcome of the pile-up of excess liquidity in the banking system caused by lower credit demand.

The excess liquidity reached an all-time high of Tk 231,462 crore in June.

“In many cases, banks will not feel comfortable in taking deposits from clients,” said another managing director.

Md Serajul Islam, spokesperson and an executive director of the BB, said the central bank had carried out a detailed study on the market before making the decision.

The volume of fixed deposits is only 30 per cent of the total funds kept by depositors with banks, he said.

“So, the decision will not adversely impact the profits of the banking sector.”

He said the purchasing power of people had been squeezed alarmingly due to the ongoing economic hardship.

“The latest measure will give a breathing room to the common people.”

(TDS)