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Borrowing costs rise on higher spread

Sajjadur Rahman
Borrowing costs have gone up for entrepreneurs thanks to an increase in interest rate spread (IRS), which is the difference between lending and deposit rates, for foreign and private banks, much to the detriment of the economy.
Bangladesh Bank has set an IRS ceiling of 5 percent, but some banks' IRS has shot well past the figure in September.
For instance, Prime Bank's IRS increased to 6.67 percent in September from 6.19 percent a year ago. Similarly, One Bank and Premier Bank's IRS jumped to 6.16 percent and 6.21 percent respectively from 5.64 percent and 5.67 percent.
Standard Ghartered Bank and Citibank, two leading foreign commercial banks, also experienced significant increases in their IRS: Standard Chartered's climbed to 10.18 percent from 9.94 percent and Citibank's to 9.47 percent from 8.2 percent, according to central bank data.
This edging of IRS has now become a source of worry for the central bank, as it will get in the way of enterprise and in turn, economic growth.
A high IRS acts as an impediment to the expansion of financial intermediation necessary for growth and development of an economy, Mustafa K Mujeri, director general of Bangladesh Institute of Development Studies, said.
"It is often argued that the higher the IRS, the higher would be the cost of credit to the borrowers for any given deposit rate," he added.
To address the issue, the central bank has formed a committee led by its chief economist to look into the matter, Mahfuzur Rahman, executive director of BB, told The Daily Star yesterday.
Borrowing costs rise on higher spread
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Meanwhile, bankers blamed a combination of the recent fall in deposit rate, poor business demand, high non-performing loans (NPL) and provisioning requirements for the increase in I RS.
Although the interest rate on deposit has fallen in recent months, lending rates did not go down proportionately, said Shafiqul Alam, managing director of Jamuna Bank, whose IRS stood at 6.23 percent in September this year.
Moreover, the rise in banks' non-earning assets due to weak demand for money has also pushed the banks into not reducing the lending rates, he added.
Helal Ahmed Chowdhury, managing director of Pubali Bank, believes high NPL is a major reason for the recent increase in some banks' IRS. Pubali Bank's IRS stood at 5.35 percent in September.
"Net interest margin has to be good to cover the provisioning requirement rises from high NPL," he said.
By the end of September, the banking industry's NPL has reached 12 percent from less than 8 percent a year ago.
Ehsan Khasru, managing director of Prime Bank, attributed his bank's soaring I RS on 'calculation' problems.
Loans to small and medium enterprises and retail sector should be left out of IRS calculation, due to the high interest rates (18-22 percent) they come with, he said. "But they are not."
Conversely, investment on government bonds, which comes with interest rate of around 10 percent, should be included in IRS calculations, but is left out. Prime Bank has over Tk 3,000 crore locked in government bonds, he said.
"So, there are factors that need to be excluded or included to get a reasonable figure for IRS," he said.
The overall IRS of the banking industry, however, remained at 5.01 percent in September, on the back of low spreads (3.35 percent) of state-owned banks.
In September, the average IRS of the 9 foreign banks' stood at 8.59 percent and the 37 private banks' 5.25 percent due to the lower spread of the 7 new banks, according to BB data.