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Banks set to slash deposit rate

Savers may flock to other investment tools

Sajiadur Rahman
Private commercial banks (PCBs) will further slash the deposit rate by 1 percentage point to 8.5 percent this month, aiming to reduce the "cost of funds" for the banks.
Top bankers have taken the decision at a meeting of the Association of Bankers Bangladesh (ABB), a platform of managing directors of PCBs.
The bankers argue that it is not possible to reduce the lending rate without trimming the deposit rate. The latest move came despite a reduction in corporate tax by 2.5 percentage points to 42.5 percent in July.
"We have decided to limit the highest deposit rate at 8.5 percent to reduce the cost of funds,” said Shahjahan Bhuiyan, managing director of United Commercial Bank and vice chairman of ABB.
The new deposit rate is likely to take effect from August 16.
An economist said savers could now switch to other investment tools that give higher returns.
"Small savers have few options other than what banks have to offer," said Mustafa K Mujeri, director general of Bangladesh Institute of Development Studies and former chief economist of the central bank.
He said some savers might flock to saving certificates that give a 12.5 percent interest rate - 4 percentage points higher than what the bank is going to offer.
In April 2009, PCBs set the deposit rate ceiling at 9.5 percent from the previous 13 percent, following Bangladesh Bank's order to limit the lending rate at 13 percent from an average of 14.5 percent. The central bank also wants the spread — the gap between lending and deposit rates -- to fall within 5 percent.
The government later cut the corporate tax rate in July 2009, to cushion the banking sector against falling investments due to the global financial crisis.
But banks are yet to pass the benefits of corporate tax cuts on to the customers, blaming the high pricesof funds.
Bhuiyan said his bank's cost of funds is 10.5 percent at the moment and the impact of the previous deposit rate cut is yet to be materialised for about 80 percent of the bank's deposits.
However, the cost varies from bank to bank.
Pubali Bank's COF was slightly below9 percent on June30.
“A cut in the deposit rate is necessary to reduce the lending rate and
the cost of fund," said Helal Ahmed Chowdhury, managing director of Pubali Bank, the country's oldest and largest private bank.
He said classified loans are also pushing the bank's lending rate up.
Chowdhury however said they lend to prime customers at rates that are even below the rate set by the central bank of 13 percent in April.
BB Governor Dr Atiur Rahman said on Sunday the cut in corporate taxes should have an impact on bank lending rates.
“The corporate tax cut should be reflected in the lending rate,’’ Rahman told a business conference of the state-owned Janata Bank. He said the rate should come down to a single digit.
sajjad@thedailystar.net