Foreign commercial banks (FCBs) are at an advantage to reap the benefits of the existing interest rate spread mainly due to their lower cost of funds.
The interest rate spread is the difference between the lending and deposit rates.
The lending rate means the rate of interest that a bank charges on its loans and the deposit rate is the rate of interest that it offers to its clients on deposits.
The interest rate spread for FCBs stood at over 6.81 per cent in October last, according to sources.
However, the market share of the FCBs in the overall banking business is still not more than 6 to 7 per cent, they said.
The spread of the FCBs was the highest among all banks. The weighted average spread between the lending and deposit rates offered by the banks was 4.22 per cent in 0ctober, 2018 while it was 4.27 per cent in the previous month.
The spread of FCBs' interest rate was 6.81 per cent in 0ctober. Their average lending rate was 9.01 per cent, not higher than the average rate of all other banks.
But their deposit rate was 2.2 per cent -- much lower than the average rate of all other banks -- during the same period, according to Bangladesh Bank (BB) statistics.
The higher interest rate spread enabled the FCBs to enjoy a better profitability position. However, their deposit rate, on an average, was just 2.2 per cent, much below that of the average rate of inflation and also that of the average deposit rate of most other banks.
Stiff competition among the banks for attracting deposits has not affected the business of the FCBs which kept their average deposit rate at a level lower than that of the average rate of other banks, a source concerned said.
The FCBs have been playing the lead role in consumer banking, besides having large corporate houses and some foreign missions as their clients.
Business with such clients and other related operations facilitated the FCBs to maintain better operational outcomes.
Intense competition by other banks to boost their business, particularly in consumer banking, is reported to be one of the causes for their high operational costs.
Besides, the burden of non-performing loans (NPLs) on banks other than FCBs has been an additional constraint for the former, he said.
According to insiders in the banking sector, the clients of the FCBs have more confidence and trust in their management, services and portfolio management.
For such reasons, they said, their clients prefer to do business with them despite getting a comparatively lower rate of return on their deposits with the FCBs.
Meanwhile, the average interest rate spread of all banks has gradually been coming down since July, 2018 when the spread was at 4.45 per cent, but it fell to 4.22 per cent in October last.
The average lending rates of state-owned commercial banks (SoCBs), specialised banks and private commercial banks (PCBs) were 6.74 per cent, 8.03 per cent and 10.22 per cent respectively in October last.
The deposit rates of SCBs, specialised banks and PCBs were 4.31 per cent, 5.63 per cent and 5.83 per cent respectively in the same month.
The falling trend in spread came against the backdrop of the banks' downward revision of interest rates on both lending and deposit in line with the decisions taken by Bangladesh Association of Banks (BAB).
Excluding consumer finance and credit card, the spread of all banks also came down to 4.14 per cent in October from 4.19 per cent in the previous month.
The central bank is working to bring down the interest rate spread below 5.0 per cent by February 2019, a BB source concerned said.
The amount of classified loans in the country's banking sector recorded all-time high of nearly Tk 1.0 trillion in September ahead of the upcoming national election.
The volume of non-performing loans (NPLs) jumped by nearly 34 per cent or Tk 250.67 billion to Tk 993.70 billion as of September 30 from Tk 743.03 billion as of December 31 last despite close monitoring by the central bank.
