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Thursday, March 19, 2009

Repo rate cut may narrow spread

The interest rate spread (IRS) is likely to shrink further with the central bank's latest move to cut the repo rate it charges on loans to commercial banks by 25 basis points.

IRS is the difference between lending and deposit rates of a bank and is widely used as a parameter of bank profitability, intermediation cost, and the degree of efficiency of the banking sector.

The spread declined by 1.6 percentage points to 5.17 percent between 2001 and 2008, according to Bangladesh Bank (BB) data.

The IRS was almost 6 percent in 2007 and the BB has long been asking the commercial banks to bring the IRS down within 5 percent.

Between 2001 and 2008, banks' average lending rate decreased by 1.4 percentage points, while deposit rate increased by 0.1 percentage points.

“The IRS has declined significantly because of persistent efforts of BB to encourage the banks to bring it down at a reasonable level to facilitate investment and growth,” a senior BB official told The Daily Star.

“We hope the spread will decline further because the BB reduced the banks' borrowing cost (repo rate) by 25 basis points to 8.50 percent last week,” he said.

The country's banking structure is segmented with state-owned commercial banks (SCB) and private commercial banks (PCB) holding 33.1 percent and 51.4 percent of total assets respectively. Some nine foreign commercial banks are also in operation.

Earlier, Bangladesh was branded as a high interest rate country compared to even its neighbours. But the situation changed significantly in the recent years. Now only India has a lower IRS than Bangladesh.

BB data show the IRS in India is at 3.50-4.00 percent, while it is 7.49 percent in Pakistan and 7.57 percent in Sri Lanka.

Of the IRS of different groups of banks, foreign commercial banks (FCB) have the highest spread with almost 9.0 percent. It is less than 5 percent for PCB and SCB, and 3 percent for specialised banks, data available in the BB's statistics division shows.

BB analysis revealed that within the structure, high IRS resulted from a number of factors including state control of lending, absence of risk management practices, accumulation of bad loans due to political interference on commercial lending decisions, and limited technical skills particularly in the arena of risk management.




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