Banks rush into deposit rate cuts

About 20 banks moved to cut the interest rates offered on fixed deposits by as much as 1.5 percentage points, a day after the central bank reset the lending rate at a maximum of 13 percent, top bankers said yesterday.

“We have decided to cut the interest rate on fixed deposits in response to an order for lending rate cuts by Bangladesh Bank (BB),” said M Ehsanual Haque, managing director of Prime Bank.

Prime Bank has reduced the interest rate on its fixed deposits from 13 percent to 12 percent. Only last month, the bank cut this rate by 50 basis points to arrive at 13 percent.

For the first time after liberalisation of interest rates in the mid-1990s, the central bank has instructed scheduled banks to reset the prime lending rates at a maximum of 13 percent. Earlier, the BB had tried to pursue banks to cut rates.

BB wants the spread between the lending and deposit rates to fall within 5 percent. The interest rate spread is the gap between the interest rate a bank pays on deposits and the higher rate it charges for loans.

Sonali Bank, United Commercial Bank, Premier Bank, Jamuna Bank, Exim Bank, Mercantile Bank, Standard Bank, National Bank, Dhaka Bank, One Bank, Southeast Bank, NCC, Dutch Bangla Bank, Mutual Trust Bank, Trust Bank, AB Bank, Eastern Bank and BRAC Bank are among the banks that slashed the interest rate on fixed deposits.

BRAC Bank has reset the rate for its two-years and above but less than three years and three years and above fixed deposit products at 11 percent, down from 13.50 percent. Dhaka Bank set it at 11.50 percent and 11 percent respectively.

Eastern Bank cut the interest rate on fixed deposits to 11.75-12 percent from 13 percent. United Commercial Bank reduced it to 11.50 percent from 13 percent.

State-owned Sonali Bank fixed its highest rate on fixed deposits at 9.25 percent from the previous 10 percent.

Other banks have fixed the rate between 12 percent and 12.50 percent from the previous 13.50 percent, according to senior officials of those banks.

“If lending rates drop, deposit rates must follow suit,” said Mahmud Sattar, managing director of The City Bank and president of the Association of Bankers Bangladesh (ABB), a forum of banks' managing directors.

Sattar said the deposit rate is the raw material for loan products.

The ABB president said many banks would not be able to implement their new rates soon because, according to central bank regulations, a bank can change the rate only once a month.

Another managing director of a private bank said: “I will wait for the central bank circular on the lending rate to decide on any deposit rate cut.”

Finance Minister AMA Muhith also said the deposit rate is entirely linked with the lending rate. His comment came after bank executives met him.

Private commercial banks have been offering at least 13 percent for fixed deposits to attract money from the market. In May last year, a bank had offered 14 percent for the fixed deposit, the highest ever in the country, and created uneven competition among the banks.

Some banks have recently reduced the deposit rates because of the global financial crisis and its impact on domestic demand.

The government and the central bank have long been pursuing the private banks to reduce the spread by cutting the lending rate. The central bank on Tuesday forced these banks to slash the rate

The Daily Star