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Private banks thrive on high lending rates

Profit shoots up 41 pc; BB to move to cut gap between lending and deposit rates

Rejaul Karim Byron
Despite a stagnant situation in the country's business sector, private commercial banks (PCBs) made 41 percent more profit last year compared to that in 2006 mainly by charging high interest rates on loans.
Available data of 26 PCBs, out of 30, show that the banks made a total of Tk 4,814 crore operating profit in 2007 while that of all the PCBs in the previous year totalled Tk3,404 crore.
"High interest rates on credits is the main reason for such a huge business by the private commercial banks," said a top banker.
He said there were hardly any expansion plans by die big business groups of the country last year, and we did not see any take out of big loans by any business group'.
According to Bangladesh Bank (BB) data, credit growth in commercial banks decreased by 8.01
percentage points in the first 10 months of 2007 compared to the correspondingperiodof2006.
In July-October period of the current fiscal year, import of capital machinery decreased by 8.33 percent, which illustrates the downward trend in investment.
“Decrease of import of capital machinery means there were low investments in the business sector last year," said a top official of the central bank. The PCBs and foreign commercial banks (FCBs) made the profit on very high interest rates on credits.
As per die BB data, the average lending rate of banks was 12.60 percent in December 2006 while the figure was 12.77 percent in June lastyear.
On the other hand, average deposit rate during this period declined. The rate was 6.99 percent in December 2006 and it reduced to 6.85 in June 2007.
The Annual Report (2006-2007)
of the BB, released last week, said aggregate Net Interest Income (NII) of the PCBs and FCBs has been very high over the period 1999 through 2006.
"Overall industry NII shows a consistently upward trend. The trend of NII indicates that the PCBs and the FCBs are charging interests at very high rates on their lending as compared to the interest they are paying to the depositors," the BB report says.
The PCBs' NII in 1999 was Tk 300 crore, which jumped to Tk 2,540 crore in 2006. In the case of FCBs, the NII in 1999 was Tk 180 crore, which jumped to Tk 820 crore in 2006
The spread (difference between interest rates on lending and deposit) is much higher in Bangladesh compared to international standard. Normally, 'spread' in banking business should be 2-3 percentage points but in
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Bangladesh the rate is 6-7 percentage points, and in June 2007 it was 5.93 percentage points.
BB sources said they have initiated steps to reduce the spread of banks in a bid to decrease business
The PCBs and FCBs have already been asked to give a work plan on how they would reduce their spread.