More than a year has already elapsed since the government announced a single digit interest structure of 6-9 per cent that became effective from April 01, 2020.The banks were initially very much reluctant to adopting in practice the single digit structure. Current practices indicate that the majority of the banks over the year indiscriminately cut down both deposit and lending rates to a level even far below the 6-9 per cent benchmark. Perhaps, the government had not anticipated so downward curtailment. The Bangladesh Bank has recently recognised the plight of specific depositors caused by declining interest on deposit, and instructed the banks not to set deposit interest below the inflation rate.
Are we rationalising the interest rates or rationing the rate for depositors and also the interest spread for the lending banks ? Two important questions crop up : (a) what are the alarming trends in clipping of interest rates? and (b) are the interests of depositors, borrowers, and banks maintained in a balanced manner? It is very important to have a glimpse at what is actually happening in the banking sector over the interest rate cuts.
It is revealed from Table 1 that 40 per cent of the banks give interest of less than 4 per cent to depositors whereas 70 per cent of the banks give deposit interest of less than 5 per cent. Only 13.33 per cent of the banks give depositors interest of 6 per cent and above. The single digit interest of 6 per cent on deposit is the maximum limit, but in absence of the bottom number, the majority of the banks have irrationally involved themselves in cutting competition.
This might have been triggered by an attempt to raise the spread. Subsequent analysis of spread experienced by different banks, and of lending rates may clarify the banks' behaviour. It may be pointed out that the actual average rates of interest on deposits will be lower than those shown in the Table 1 if the impact of different banks' committed old ( prior to introduction of single digit interest rates) fixed deposits for which rates of interest were stipulated at more than 9 per cent to 14 per cent is excluded.
Table 2 indicates that 30 per cent of the lending banks charge interest of less than 7 per cent and 71.67 per cent of the banks offer lending rate of less than 8 per cent. Borrowers enjoy from 0.02 to less than 9 per cent interest on their advances from 98.33 per cent of lending banks. Sixty banks stated in the table comprise all indigenous and foreign banks (only National Bank of Pakistan lends at 0.20 per cent). Lending rates set at levels far below the maximum limit of 9 per cent scale down not only the return of the depositors to a considerable extent but also the spread level of the banks. We wonder how inconsiderate decisions on lending rates are taken by most of the banks.
Table 3 shows that 55 per cent of the banks earned a spread of 3 per cent and above while 45 per cent of the banks had a spread of minus figure to less than 3 per cent. However, 31.67 per cent of the banks gained a higher level of spread (4 to 6.77 per cent).The single digit interest structure of 6 to 9 per cent implies a spread of 3 per cent. Is a 3 per cent spread enough for a bank to operate with a minimum level of risk-adjusted profitability? It seems unreasonable to fix a cut-off point arbitrarily. The spread should be researched out with appropriate methodology and expressed in terms of a range instead of a fixed number. A great paradox is that a good number of banks lowered both deposit and lending rates, and also experienced lower level ( even negative too) of spread. How have they taken so imprudent decisions only benefitting borrowers and harming even themselves as well as depositors?
Banks are in intermediation role. They must run profitably to survive. But the profitability of the banking sector (excluding Islamic banks) has been at stake over the few years. Profitability plummeted to 0.25(Return on Assets) / 4.28 (Return on Equity) per cent from 0.70 (Return on Assets) / 9.6 (Return on Equity) per cent in CY 2017 (Bangladesh Bank Quarterly Issues, January-March 2020, 2021). Banks' net profit decreased 33.20 per cent in CY 2020 as compared to that in CY19. One of the reasons explaining reduction of bank profitability in CY 2020 was interest rate ceiling which contracted interest income (Financial Stability Report, 2020, Issue11, Bangladesh Bank).The stability report adds that the average spread for the banks fell to 3.1 per cent in December 2020 from 4.0 per cent in December 2019. Is it not necessary to examine whether the banks in general suffer from interest rate rationing?
Analysis of the tabulated data suggests that among the three parties (depositors, banks, and borrowers), only the borrowers have been in a better position to reap the benefits of rationalised (in practice, meant to be reduced to serve mainly borrowers' interest ) interest rate since introduction of single digit structure.
On the contrary, small and lower- middle depositors are the worst sufferers. However, they are likely to sigh a relief to some extent due to the blessings of the Bangladesh Bank's recent directive to offer the specified category of depositors an inflation-adjusted interest rate on fixed deposit. Banks' shrinking spread percentage arising out of the current interest rates, and also of intra-industry cum corporate level ill-conceived decisions has, in part, affected their profitability. The issue of reality-based spread versus directed spread has become a great concern for the banks. This needs to be addressed judiciously.
Bangladesh Bank's instruction for inflation-based fixed deposit rate is laudable, but not backed by an appropriate strategy of implementation. It is hardly possible to protect the interest of depositors without suitably fixing the lending rate which is the basic determinant of depositors' return and banks' spread. That tripartite interest inextricably linked with setting interest rates, either on deposit or on advances, is totally overlooked. The Bangladesh Bank's guideline rather reaffirms that the lending rate would remain unchanged at a maximum of 9 per cent. According to Scheduled Banks Statistics, January-March, 2021, currently 44.01 per cent of fixed deposit bears an interest range of 0.20 to 5.75 per cent. Even after so low level of interest on deposit, the interest spread of 45 per cent of the banks lies below 3 per cent. Above inflation rates are sure to further curtail the existing percentage of banks' spread.
We fail to understand the fact that depositors, borrowers and concerned lending banks are in a symbiotic relationship. Any kind of deprivation, discrimination, and domination disintegrates the bonding. It is, we think, the prime responsibility of the central bank to take steps to strengthen the said relationship removing the chasm if there is any. Businessmen's cooperative spirit and the high quality of corporate governance in banks are also prerequisites for the bonding. Interest rates, a multifaceted phenomenon, need to be rationalised (instead of being rationed) in true sense that equally satisfies the tripartite interests.
Haradhan Sarker, PhD, is ex-Financial Analyst, Sonali Bank & retired Professor of Management. [email protected]